SMEs are still finding it hard to get the funding they need to grow their businesses. But the key to success could be to bypass the banks.
British businesses’ ability to obtain outside funding remains low and is likely to limit their growth. Figures published recently by the UK’s largest independent research consultancy, BDRC Continental showed that in 2014, use of external finance by small and medium-sized enterprises (SMEs) had fallen.
Only 37% of firms used some form of third-party borrowing last year – and this figure had “declined steadily” over time from 46% in 2011. BDRC Continental found that the use of loans, overdrafts and credit cards was down sharply in 2014.
One of the most significant consequences of this inability to obtain credit will be that companies find it harder to expand, says BDRC spokeswoman Shiona Davies. “Growth in the economy will be very difficult without increased finance”, she explains.
It doesn’t have to be like this. Even though media reports over recent years have reinforced the idea that SME funding is impossible to come by, the availability of finance - especially from sources outside the mainstream - is actually improving, according to Rob Donaldson, Head of Corporate Finance at Baker Tilly.
“The climate is better now compared with the last five or six years,” he says. “The economy has turned and lenders of all descriptions are generally feeling better about the world.” Donaldson adds that if you want your business to grow at a decent rate, it is well worth considering some form of outside help. “External funding can help you pay for investment in capital expenditure or provide working capital” he says. “If you are increasing your customer base or targeting new markets, you may find you need to buy extra stock in advance of selling it – and that requires cash.”
Seeking finance as an established business can be more straightforward than doing so as a start-up. Many types of lenders will only advance significant sums of money to firms who have a record of generating revenues and, ideally, profits. Banks in particular are still scarred by the credit crunch and are extremely reluctant to lend to new businesses or those that they consider a higher risk.
Alternative finance providers such as peer-to-peer lenders like Funding Circle will only offer credit to companies that have more than a one year trading history under their belts.
If, however, you are interested in borrowing against the value of your firm’s outstanding invoices by using invoice discounting or factoring, the length of time that you have been trading is less of an issue. Lenders will be more likely to consider factors such as a good credit history and a strong business plan.
If your company needs to borrow, it is worth persevering even if you are rejected by the first lender you approach. However, recent government research suggests more than 70% of businesses fail to seek a second opinion after being turned down. Most of these firms first approach their banks for finance, the research shows, even though other sources are likely to be more fruitful. For example, figures from the Asset-Based Finance Association (ABFA) indicate that the take-up of the likes of invoice discounting and factoring rose significantly last year, with almost £20 billion advanced in the last three months of 2014 - a record high.
ABFA chief executive Jeff Longhurst says many growing businesses are opting for asset-based finance because it is generally a quicker way to arrange credit. He adds: “For a business looking to capitalise on a growth opportunity, being able to raise and deploy funds rapidly can give you a vital edge over your competitor.”
Another key to successful borrowing is to be ready to explain to potential lenders exactly why you need the money and why you are a “safe bet”, Donaldson says. “Sometimes people are just very poorly prepared: turn up with a couple of pages of spreadsheets and think that’s enough. It very rarely is.”
Instead, he adds, you need to have a detailed forecast of what you plan to achieve, and a clear explanation of how you are going to realise that forecast.
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