Home
Resource Centre
Business Fact Sheets
Finance & Banking
Finance & Banking
Everyone needs finance to start a business. Whether the sum is a little or a lot, it has to come from somewhere.
There are many ways of accessing funds, from using your own savings or borrowing from a bank or other lender, to crowdfunding or applying for grants.
We explore the various options below.
Funding
Grants
These days, there are many types of grant on offer, from awards to specific groups of people such as young entrepreneurs, to funds for specific projects, such as European patents.
According to HM Revenue and Customs (HMRC), more than 500 schemes in the UK offer grants to new organisations across all sectors.
However, generally speaking, grants and awards are particularly appropriate for the following:
- Business start-ups
- Younger people in business
- Ex-forces personnel
- Businesses in rural areas
- Businesses in areas of traditionally low unemployment
- Microfirms or microenterprises – organisations with a small number of employees and limited initial capital that will not have access to traditional commercial loans
Good places to look for grants that might be appropriate for your business include the Department for Business, Energy and Industrial Strategy as well as HMRC's site and the European Commission’s UK representation page https://ec.europa.eu/unitedkingdom/business-funding_en.
In addition, a quick trawl of the Internet will yield useful and interesting information on grants that might be available to your business.
You can also keep up to date on potential funding sources by subscribing to news feeds and blogs published by start-up sites and trade bodies, which are likely to contain relevant information.
Finding funding
If you’re not eligible to receive a grant, then there are a number of other avenues you can explore to find financing for your business.
Using your own assets
Lender reluctance to fund small businesses despite ongoing central government efforts to stimulate economic growth has resulted in many entrepreneurs using their own money to start and maintain their businesses, using savings, inheritances and even personal credit cards.
However, the Bank of England has refocused its Funding for Lending Scheme (FLS) http://www.bankofengland.co.uk/markets/pages/fls/default.aspx so it can reach small and medium-sized enterprises (SMEs – organisations with fewer than 250 employees), rather than individual borrowers. There are more than five million British SMEs, which account for approximately 99 per cent of UK business.
High street banks are also reviewing their lending policies as alternative funding sources are attracting more SME custom and decreasing the banks’ market share (see below).
Borrowing from friends or family
If you don’t have cash yourself, and don’t feel you can turn to a traditional lender, you can always try borrowing from friends and family, although this will almost certainly affect the relationship you have with the person who lends you money.
It is essential that you treat an inter-family transaction as you would treat borrowing from any other lender, so draw up proper contracts and agree on terms, such as the length of time you can borrow the money and whether you have agreed that interest or a benefit in kind will apply. Ideally, take professional advice so that, once the contract is signed, everyone has peace of mind about the arrangements and you can concentrate on running your business profitably.
Traditional lenders
Lenders such as banks or building societies will offer funding either as a loan or an overdraft, but they will want documentation to prove you can repay the money, so be prepared to answer a lot of questions.
Don’t be put off from applying just because you feel you’ll be turned down. As the old saying goes, if you don’t ask, you won’t get – and the government is putting a lot of pressure on traditional lenders to extend credit to small firms, both through FLS and other loan schemes, as well as making it more attractive for the lenders to fund you.
Lenders are also being squeezed for market share by ‘alternative lenders’, such as ‘challenger’ banks, peer-to-peer lenders, asset-based lenders and the crowdfunding contingent. They are all competing for your business, and need to keep their client lists full, so now could be a good time to investigate which one will offer you the best deal.
In the past, poor lending figures were excused by bankers saying that there was no call for the money from small enterprises. Call now, and you might be heard!
Alternative lenders
Non-bank lenders have come to the fore in the UK over recent years, with alternative financing becoming more attractive to small and medium-sized enterprises (SMEs), which are seeking business funding from wider sources than their own banks now the finance market has opened up to competitors offering viable loans to meet specific needs.
Alternative lending sources include challenger banks, asset based lenders, peer-to-peer lenders, crowdfunding and government schemes.
Challenger banks
Recent entrants to the banking market, such as Metro Bank, Virgin Money and Aldermore, are all after the business market, even though they are unlikely to make much of a dent in the share the ‘big four’ collectively enjoy any time soon.
Having said that, challenger banks have all seen the gap in the market, and are fully aware that businesses like yours need funding from sympathetic banks, so they aim to be more customer-focused than the big banks. Most have gone back to the relationship manager model, so that business owners have a human being to talk to when the going gets tough and can feel supported.
Asset-based lenders
These fund providers have been around for more than forty years and tend to focus on smaller firms, so they could be a good bet for businesses that need help with cash flow.
New businesses that have not been trading long enough to establish a decent credit history can use asset-based lenders to get cash by putting up assets, usually receivables or inventory, as security. These lenders can also offer funding through factoring or invoice discounting.
If a small firm goes for a factoring arrangement, the lender agrees to pay an agreed percentage, usually around 80 per cent, of approved debts as soon as an invoice is sent, meaning that a business is less at the mercy of slow payers. The factor then operates as a credit controller and chases for payment and pays the balance to the business once the debt is discharged. The factor typically charges a fee of up to 2.5 per cent of the firm’s turnover.
Invoice discounting works in a similar way, but the firm does its own chasing of the debt. Because of this, the charge is much lower – typically under one per cent of turnover or a flat monthly fee.
Peer-to-Peer lenders
The idea with this is that investors in these schemes either get their money back with interest, as well as having the warm glow of having backed an idea they think will work, or they receive shares in the business. Peer-to-peer lending is an online practice bypasses traditional financial intermediaries, such as banks, and matches potential lenders to businesses seeking funds.
Peer-to-peer (P2P) lending to businesses totalled £4.4bn in 2015 – an increase of 228 per cent since 2013 – so it’s not insignificant in terms of loan proportions, and it’s constantly growing, despite the Financial Conduct Association (FCA)’s tightening of P2P regulations in recent years.
Currently, people who lend money to businesses through P2P websites will be given a cooling-off period, while lenders and the small firms who borrow from them will have 14 days to withdraw from deals with no penalty.
Crowdfunding
This is where an entrepreneur puts his or her business idea into an online marketplace and asks for money to help implement it. Investors can contribute as little as £10 each, but the idea is that lots of small amounts add up to a meaningful overall total.
The investors are rewarded with products or profits on their shares by the business promoter.
FCA rules are in place to ensure that crowdfunders undertake responsible advertising and only promote their products to sophisticated investors.
Government schemes
There are many different types of grant, but most are difficult to obtain, so you will need to do your homework and prepare a good business case. Local enterprise advisors such as the Chamber of Commerce can help with information on the grants for which you might qualify.
The Seed Enterprise Investment Scheme (SEIS) www.gov.uk/guidance/seed-enterprise-investment-scheme-background allows investors to offer funding of £100,000 in a single tax year, which can be spread over a number of companies. Any one company, which must be no more than two years old, have fewer than 25 employees and assets worth less than £200,000, can raise no more than £150,000 in total via SEIS investment, and investors can’t have more than a 30 per cent stake in the business they invest in. The scheme’s attraction is that investors can receive up to 50 per cent tax relief in the tax year in which the investment is made.
The parent of SEIS is the Enterprise Investment Scheme (EIS) www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction, which is designed to help small business raise finance by offering a range of tax reliefs to investors purchasing new shares in the business. The business must not have gross assets of more than £15 million before the share issue, and it must have fewer than 250 full-time employees.
The Venture Capital Trusts (VCT) scheme www.gov.uk/government/publications/the-use-and-impact-of-venture-capital-schemes is designed to encourage individuals to invest indirectly in a range of small, higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange.
© Copyright JE Consulting 2016. All rights reserved.