Finance & Banking
Everyone needs finance to start a business, whether a little or a lot and that cash has to come from somewhere. There are many ways of accessing funds, from using your own savings or going to a bank or other lender to crowdfunding or applying for grants, so here we explore the various options.
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 HMRC, there are over 500 available schemes in the UK that 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
- Micro Firms
Good places to look for grants that might be appropriate for your business include the Department for Business, Innovation and Skills, as well as HMRC's site and the European Commission’s UK representation page.
In addition, depending on your business, a quick trawl of the Internet will yield interesting information on what grants might be available and, depending on where in its history your business is, you could keep up-to-date by subscribing to start-up sites’ news feeds or those of trade bodies.
If you’re not eligible for a grant, then there are a number of other avenues you can explore to find money.
Using your own assets
Given lenders’ recent history of funding small businesses, it is hardly surprising that a lot of entrepreneurs have used their own money to start and maintain a business, either with savings or inheritances or even personal credit cards. However, that is hopefully changing now that the Bank of England has changed the focus of its Funding for Lending Scheme (FLS) to small businesses rather than individual borrowers.
Borrowing from friends or family
If you don’t have the cash yourself and don’t feel that you can turn to a traditional lender, you can always try borrowing from friends and family, although be aware that it can change the dynamic of the relationship.
It is also essential that you treat the transaction in the same way that you would with 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 any interest. Ideally, take professional advice so that once the contract is signed, everyone has peace of mind and you can concentrate on making money for all concerned.
Lenders such as banks or building societies will offer funding either as a loan or an overdraft but they will want documentation to prove that you can repay the money, so be prepared to answer a lot of questions.
However, 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 schemes, as well as making it more attractive for them to fund you.
They are also being squeezed for market share by what are called alternative lenders, such as the so-called ‘challenger’ banks, peer-to-peer lenders, asset-based lenders and the crowdfunding contingent and need to keep their client lists full, so now could be a good time to apply.
In the past, the poor lending figures were excused by bankers saying that there was no call for the money from small enterprises. So call and you might now be heard.
Non-bank lenders have come to the fore in the UK over recent years, with the FT reporting that alternative financing for small and medium-sized enterprises (SMEs) hit a five-year high in October 2013.
New 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 ‘big four’ any time soon.
Having said that, they have all seen the gap in the market – meaning that they have realised that businesses like yours need funds – so they are aiming to be more customer-focused than the big banks and 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.
These fund providers have been around for over 40 years but the third quarter of 2013 was their strongest ever showing and they tend to focus on smaller firms, so 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 the business is less at the mercy of slow payers. The factor then operates as a credit controller and chases for payment and the balance is then paid once the debt is paid. 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 firms does its own chasing of the debt. Because of this, the charge is much lower and is typically under one per cent of turnover or a flat monthly fee.
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 receive shares in the business. An online practice, it matches peers, bypassing traditional financial intermediaries, such as banks.
Peer-to-peer or P2P lending to businesses totalled £193m in 2013, so it’s not huge but also not insignificant and it’s growing, although the Financial Conduct Association tightened regulations around the sector in October 2013.
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.
This is where an entrepreneur puts his or her business idea into an online marketplace and asks for money towards implementing it. People can invest as little as £10 each but the idea is that lots of small amounts add up to something meaningful. The investors then get rewarded through products or profits on their shares.
However, the FCA also cracked down on this in 2013 and crowdfunding firms must now advertise responsibly and only promote their products to sophisticated investors.
Various government schemes
There are many different types of grant, but many are difficult to get so you will need to do your homework and prepare a good business case. Your local Business Link can help with information on the grants you might qualify for.
Under the rules of the scheme, investors can input £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 with assets of 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.
Its attraction is that investors can receive up to 50 per cent tax relief in the tax year the investment is made.
Parent of the SEIS is the Enterprise Investment Scheme (EIS), which is designed to help small business raise finance by offering a range of tax reliefs to investors purchasing new shares in the business.
Meanwhile, the Venture Capital Trusts Scheme (VCT) 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.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, neither the authors nor the firm can accept responsibility for loss occasioned by any person acting or refraining from action as a result of the material.
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