The dash for cash: The best external finance options for SMEs

Clive Lewis, head of enterprise, ICAEW on where to get funding for business growth

This week started off with sombre news that lending to businesses will hit a seven-year low this year. UK banks will lend £422bn to British firms this year, the lowest amount since 2006.

These figures might not come as any surprise to SMEs that have been either discouraged or turned down by the bank for a loan. According to the recent SME Finance Monitor quarterly survey, nearly 400,000 SMEs said that they wanted to apply for finance from a bank but didn’t in the last quarter of 2012.

So what are your alternatives? Where do you get that critical bit of funding to scale your business?

To find out your best option, first answer some crucial questions

If you cannot get a loan or an overdraft from a high street bank or even if you can there are sometimes alternative forms of financing which better suit the purpose for which you require the finance.

You should always start by asking how much are you looking to raise and whether you require the money for the short term or long term? Are monies needed for growth or just to sustain your business? Do you have security to offer over an asset? Finally are you prepared to bring in an outside investor and give up either a minority or majority stake?

Where to get funding? Look online!

The internet has resulted in a host of new finance providers which basically offer three types of funding – debt funding, equity finance and working capital funding. These providers seek to match businesses looking for finance with individuals and businesses looking for diversification of risk and yield. The business models vary and it is vital to understand how risk of proposition has been assessed, although the greater risk is with the finance providers. Generally the cost of finance through the internet is higher than from a high street bank but it is can be more accessible. 

Debt funding through the internet

Businesses looking for debt finance are required to complete an online application form. The acceptance criteria vary but typically businesses must be UK based limited companies with at least two years financial reports, making a profit and with a good credit rating. Full disclosure of existing loans and commitments will be required. Up-to-date management accounts might also be a requirement.

Once the loan application is accepted for entry, the auction can commence. The loan proposition is given a risk rating by the lending platform. Registered lenders start bidding the amount they are prepared to lend and the interest rate they expect to be paid. As bidding intensifies the interest rate tends to drop. Applicants are accepted for the loan as soon as it is fully funded

The loan will be paid into applicants bank accounts with a period from three days to two weeks. The peer-to-peer lender will charge an arrangement fee – either a percentage of the loan or a fixed amount. The applicant business repays the loan to the peer-to-peer lender who is responsible for distributing the repayments to all lenders involved in the loan

Equity finance through the internet

Businesses seeking equity must complete a questionnaire specifying how much finance is required and the equity percentage on offer. A persuasive business plan is essential. The disclosures are reviewed to ensure they are fair, clear and not misleading. Listing is then approved

Investors can invest from £10 up to the full amount required. If the full amount is offered within a specified period the investment goes to closing, if not investors get their money back. In the closing process legal due diligence is conducted and the business signs the documentation and online platform subscribes for shares on behalf of investors

At this stage the peer-to-peer platform charges a fee for obtaining the equity finance. Because there are likely to be many equity investors providing relatively small sums to spread the risk, the online platform holds shares as nominees for the investors. Dividends from the business receiving the equity or sale proceeds when business floats or sells out are paid to the online platform which passes the proceeds back to investors.

Invoice factoring and discounting through the Internet

The area of internet selling of sales invoices probably represents one of the biggest potential new sources of finance. Businesses can sell invoices through an internet marketplace to investors who bid competitively to offer the best terms. A major advantage of this form of finance is that it can be fast, providing finance in less than 24 hours of the invoice being raised, and is flexible.

Invoices need to be to customers who are credit-worthy, established businesses and many platforms require a minimum invoice value. Typical discount fees vary but can be as low as 1 to 2% of invoice value per 30 days outstanding.  

E-Invoicing, debtor management & arranging finance

Many large customers now require their SME suppliers to invoice through the internet. There are various packages available but making sure the package works with the customer’s software is an issue. Where this operates the SME supplier creates a sales invoice from their own accounting package or they upload a template from a software provider. Invoices can be electronically submitted to customers in a number of ways including by email direct from your accounting platform or integrating with the software providers platform and sent direct to customer portal

Once the invoice has been sent the platform sends automated reminders to customers.  Customer updates of the status of the invoice in their system can result in automatic update of your collections forecast. The platform provides feedback on customers’ payment performance and cost of outstanding debt.

The platform can link a finance application to a finance provider. The business uploads key supporting documents and invoices to support its borrowing case. The documents cannot be accessed by potential lenders until the SME grants access. This can help a growing SME build relationships with finance providers.  

Even the banks are going online

The high street banks are always going to be a major provider of finance particularly to larger SMEs with more complex financing requirements needing face to face discussions. However even the banks are now providing an online application process, particularly for smaller amounts. Perhaps now is the time to consider the newer online facilities available to businesses. 

If you want to have a discussion about the alternative types or sources of finance or help preparing an application for finance or a business plan, the ICAEW Business Advice Service (BAS) is an easy way to have that discussion. Its available now – a straightforward, open discussion with an ICAEW Chartered Accountant. There is no catch, no obligation, no time-wasting and there is no charge for the first session – just practical thinking to help businesses succeed. After one meeting, we are sure you will notice the difference

To find out the issues BAS can help with go to:

 www.businessadviceservice.com  

Clive Lewis is the head of enterprise at The Institute of Chartered Accountants in England and Wales (ICAEW)

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