Securing funding during the downturn

The papers are currently brimming with articles penned by analysts who believe that the worst of the recession is now behind us. Many of the major world economies have now exited recession, and it is thought that the UK could follow this year. A sustained and sustainable recovery is, of course, good news for business.

But, while consumer credit might be easing, many small businesses are finding it harder than ever to secure funding. A recent report by the Confederation of British Industry found that, although credit conditions are better for large businesses today than they were at the beginning of the year, SMEs are enduring a “decline in the availability of existing credit lines” and experiencing no improvement in the availability of new finance.

As a result, an increasing number of small businesses are finding it necessary to seek out alternative sources of funding to help ease their cashflow and enable them to invest for growth. Securing finance during the current recession is difficult, but there are numerous important opportunities that should be considered.

Friends and family

Friends and family often represent the first port of call for start-ups in need of funding. Commercial backers such as banks will often look at this first round of funding for evidence that the business owner is serious about the venture and confident in its potential; if they are willing to put up their own money and that of their family, commercial lenders are more likely to follow suit.

If you are considering taking investment from friends and family you should remember that, regardless of your relationship, you are entering into a business deal. As such, you should ensure that you have a legally binding agreement drawn up, outlining the terms of the transaction. This will help to avoid conflict in the future, particularly if your venture does not progress as anticipated.

Government support

The government recognises the difficulties facing SMEs seeking funding, and has introduced a number of schemes aimed at getting cash to viable businesses. However, the government is not lending directly to businesses; instead, they are offering encouragement and guarantees to commercial lenders. As such you will still need to convince a bank that your business is a viable commercial prospect in order to secure funding. The government’s loan guarantee schemes are available to businesses working in all sectors, although particular help is offered to companies in the automotive and ‘green’ industries.

The Enterprise Finance Guarantee is the most important of these schemes. Under this scheme the government will guarantee a 75 per cent portion of qualifying loans of up to £1 million made to businesses with a turnover of up to £25 million. If you wish to take advantage of this scheme you should remember that you may well have to approach numerous lenders; somewhat scandalously, comparatively few business banking staff are even aware of the terms of this scheme and, as a result, many are unwilling to make use of it.

The launch of new regional investment funds now also looks set to go ahead. These are financed by the European Investment Bank, but will be administered by regional authorities. Again, these funds are being operated as profit-making businesses in their own right; funding will only be extended to businesses that can demonstrate their own viability and their plans for long-term growth. The first fund will launch in the North East in the coming months.

Asset and invoice finance

An increasing number of businesses of every size are also turning to asset and invoice finance as a way of raising cash quickly - either in addition to or in lieu of traditional lending. Invoice finance can help you secure up to 90 per cent of the face value of invoices you raise, within 24 hours. Depending on your arrangement with your ‘factor’, it is also possible to delegate the task of chasing invoices - freeing you up to get on with actually running your business. Similarly, asset finance allows you to borrow quickly against the value of your assets. This is particularly useful for retailers that are enduring cashflow problems as a result of temporarily low consumer spending.

In order to take full advantage of the benefits offered by invoice finance it is important that you find the right factoring company. Simply Business can help you find a factor that understands your company and can provide you with long-term support that grows with your business.

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Equity finance

So-called ‘angel investment’ is very difficult to come by in the current climate, as private investors retreat towards low-risk opportunities. However, viable businesses with a demonstrable plan for rapid or long-term growth will always represent an alluring investment.

One of the most potentially important schemes launched by the government in response to the downturn is the Capital for Enterprise Fund. This provides equity investment to companies that wish to invest for long-term growth but are servicing large debts. The fund will buy up debt in exchange for equity, thus reducing the cost of servicing the debt for the business and providing the capital needed for investment. The fund is being run by professional investment managers. Details about the application process can be found on the BusinessLink website.

Regardless of any apparent or impending recovery, small business lending conditions are likely to remain tight for some time yet. But small business owners should remember that, in many ways, there are more sources of alternative funding available now than at any time in recent history. Ensuring that you are aware of these opportunities is vital if you are to secure the finance you need to grow your business effectively.