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Firms seek alternative funding to expand

by LLB Editor
30th Jul 12 3:31 pm

Many entrepreneurs are looking for new ways to raise cash amid fears that difficulties with external funding could block their expansion plans, a survey has shown.

The Investec Entrepreneur Confidence Index, which collected responses from 48 mid-market entrepreneurs, showed that 69% believe they could struggle to secure capital over the next 12 months, while around a fifth (22%) said it would be ‘very hard’ to do so.

This is despite the participants’ businesses having an average turnover of £54 million each.

Dr Stephen Bence, director of BusinessFunding.co.uk, said it is important for firms to continue pursuing expansion plans, despite the current climate.

He said: “Only the companies that have the courage to expand during the hard times will be ready to reap the rewards when the good times come round.”

Some of the alternatives being looked at to raise funds include using retained earnings (79%), bank loan/overdraft (57%) and invoice discounting or asset based lending (28%).

Another method being looked at by 23% of those questioned is raising equity from a venture capitalist/private equity firm

Bence added: “It’s natural that companies that are sitting on cash would rather spend it to expand than seek external funding; even good companies can find it hard to negotiate good terms with a funder during bad times.

“That said, it’s surprising that so few are seeking equity funding; receiving money that doesn’t have to be paid back, unlike a loan, is good for cashflow when money is tight and leaves companies freer to focus on growth.”

Ed Cottrell, from Investec, said: “Clearly, as many believe that access to capital is going to remain difficult for the next year or so, many are looking to use retained earnings or extract funds from their existing operations through selling part of them, for example. Alternative sources of finance including mezzanine finance and asset based lending are also proving attractive, which is a key reason why over the past 12 months, we have dramatically increased the amount of money we have lent to successful entrepreneurs. We will continue to support as many as possible moving forward.”

Bence also highlighted that securing equity funding could be more viable for businesses than turning to the banks.

“Different sources of finance have been affected differently by the adverse economic climate,” he said.

“Banks are going through an existential crisis at the moment, partly caused by recent mis-selling scandals, so business lending may take a few years to recover. But equity funders, particularly venture capital firms, are weathering the downturn well and continue to invest widely in the UK, according to BusinessFunding.co.uk data.”

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