Jeremy Coombes, CEO of Ultimate Finance Group, explains the alternative finance options open to small businesses struggling to access traditional bank loans. This article is part of the BusinessZone.co.uk Finance Masterclass.
Earlier this month, The Bank of England announced that net lending fell by £2.4bn in the final quarter of last year compared with the previous three months. As the government announces its intention to continue generous tax relief measures for investors, the good news is that there is a range of alternative sources of finance available to SMEs designed to complement traditional bank lending.
Alternative finance solutions
1. Invoice discounting and factoring
With many companies negotiating 90 day payment terms, many SMEs experience cashflow problems as a result of the lag between raising an invoice and customer payment. Invoice discounting can help businesses to access credit raised against unpaid invoices. Providers can offer up to 85% of the value of unpaid invoices (usually within 24 hours); depending on the agreement and provider, customers can also take advantage of factoring services which can help businesses to manage their ledger and provide credit control advice, too.
With a fixed fee facility customers have the additional benefit of a fixed monthly service charge to help owner / operators budget more accurately.
2. Asset finance hire purchase
For businesses that need to purchase expensive equipment, asset finance can offer the perfect solution – helping to spread the cost of buying business assets. What’s more, it offers companies complete control, as the asset is owned outright at the end of the agreement.
Companies can take advantage of regular monthly or quarterly payments (usually a set amount) too, helping them to forecast cash flow; and there are no tax implications, as the business will be recognised as the owner of the asset from the off and can claim capital allowances throughout.
3. Enterprise Finance Guarantee loans
Enterprise Finance Guarantee (EFG) loans allow businesses to access funds through a range of facilities including invoice discounting, new loans, overdraft facilities and restructuring of existing debt. EFG loans are offered by a range of financial providers and are incentivised by the Government, who offer a guarantee to the lender covering 75% of the loan if the borrower defaults on repayment.
EFG loan providers are a great source of accessible finance and will often afford better rates to businesses eligible for the scheme.
4. Peer to peer lending
Peer-to-peer lending describes the practice of individuals lend money to businesses that require a cash injection.Peer-to-peer providers will act as an introducer, and take a fee for this service. This year the lenders operating in this market are expected to arrange some £500m of lending business. Peer-to-peer lending is high risk for savers, if the borrower does default, it is the savers who will lose, and not the peer-to-peer lender sat in the middle.
Lower operating costs mean that providers can offer cheap loans and pay higher interest rates to savers. None of the current peer-to-peer schemes are covered by the Financial Services Compensation Scheme so savers have no option for compensation if they lose money.
5. Crowdsourced finance
Crowdfunding is the process of a start-up or existing business asking for money, usually on a via crowdfunding companies that operate online. The business seeks financial support from members of the crowdfunding community. Entrepreneurs or businesses are invited to pitch their idea to members, and if the crowd is interested in a project - and they think the candidate is passionate enough to make it work – they will ‘pledge’ their money in support.
There are two types of crowdfunding - reward-based and equity-based funding. Reward-based funding offers crowd members a reward in return for their investment, whilst equity-based crowdfunding allows people to invest, even small amounts of money, in projects and, in return, receive a small piece of ownership of the project.
Open for lending
Whatever the business needs, there is funding available. Advice can be sought through accountants, banks or by contacting an independent advisor. However, certain forms of finance do lend themselves particularly well to one industry or another.
Factoring is particularly suitable for industries which operate through the placement of orders and issue of invoices, for example recruitment agencies, couriers, manufacturers, telecommunications operators, printers and wholesalers.
Asset-based finance on the other hand is particularly suitable for industries where heavy duty equipment is required; most commonly facilities will be used to finance the purchase of cars and vans, HGVs, buses and coaches, plant and machinery, agricultural equipment and construction and materials handling equipment.
Peer-to-peer finance is ideal for businesses with strong links to the local community, it is one of the more informal forms of finance on the market; ideal for businesses looking for a short term injection of funds.
Crowdsource financing services are predominantly used by start-ups, particularly businesses operating in the e-commerce and technology industries. Lenders are often digitally-savvy, and invested in digital industries.