Finance options for start-ups and SMEs

Rose Lewis, a partner at financial consultancy Pembridge Partners, explains the various financial alternatives for the intrepid small business owner when a bank decides to play hardball.

Whether it’s start-up finance or expansion capital you’re after, your local bank doesn’t have to be the sole gatekeeper of liquidity.

1. Grants, loans and investment funds for small businesses

So you have been around all of the banks and no luck. Depending on where you are based, there are some regionally based grant monies, loan monies and investment funds aimed specifically at ambitious companies. These work on a slightly different basis than banks in regards to a term loan, but they have a vested interest in developing enterprise within their given region.

Although they will not generally lend to a lost cause – or to a business where the risk is too large – they will entertain propositions that the banks turn down as that’s their raison d’être. It should be noted that the new government is axing these Regional Development Agencies and some of these funds are directly linked to them. The good news is that, as far as we know, many of the funds will continue and while the RDAs are still in place it is worth going to them to ask about finance.

UPDATE: Since 2011, the RDAs were replaced by Local Enterprise Partnerships – voluntary partnerships between local authorities and businesses set up by the Department for Business, Innovation and Skills to help determine local economic priorities and lead economic growth and job creation within the local area.

2. Consider invoice financing

If you are b2b and have corporate customers, you could use those contracts as collateral against a loan in the form of invoice discounting.

SMEs using invoice financing is increasing as small companies are looking for new ways to deal with funding for their expansion. Invoice finance will free up cash and working capital by borrowing against the business’s unpaid invoices, which can be vital as customers use the downturn as an excuse to pay bills more slowly. Invoice finance ensures that an outstanding invoice that a big customer might sit on for months gets turned into cash quickly.

Related: What is invoice finance? – Conrad Ford details what it means for your small business to take out invoice finance.

3. Check out another bank

Just because your own bank said no, it doesn’t mean another one will give you the same response. Banks need new business and frequently will stretch that bit further.

One needs to think of banks as just another supplier and go with the best deal offered. As we all hear in the press, the banks are tough places right now and in reality are not lending new money to small businesses. But they are replacing debt from other banks at cheaper rates, which is something worth looking at if you already have debt in place, as a 2 per cent saving on £100,000 is £2,000 per annum – money we could all use elsewhere.

4. Friends, family and angels investors

Friends and family should really be at the top of any list. They know how good you are and should be happy to support you, especially if you give them a couple of points of equity as a kicker. See: Finance from friends

There are also a growing number of high-net individuals who are looking to invest in high-growth start-ups, known as business angels.

For more information about angel investors, click here

5. Have a plan

Whatever you decide to do next, just remember to review your business plan again. As mentioned in my previous article, it’s the roadmap any investor requires to learn what makes your business fundable, how you’re doing now and what you plan for the future.

It is critical to ensure you are on track to reach your goals and that you have a solid plan for getting there.

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Business Angels

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