From crowd-funding to equity finance, this is your fast-growth need-to-know

Some 58% of small and medium-sized enterprises (SMEs) use just one source of start-up finance and only 40% of SMEs use external finance.

These statistics are of some concern – as SMEs grow, there is a danger that an over-reliance on single-source-finance could slow their progress or inhibit their potential. There are a wide variety of options available on the market, which can support business’ growth and adapt as their needs evolve and become more complex.

This article discusses the increasing use of alternative financing solutions among mid-corporates, some of the options currently available and how to decide which are best for your business plans.

Growing businesses, changing needs

Karl Nolson, Head of Debt Finance, Barclays says he observes more clients asking about alternative sources of finance. As a result he has also seen the composition of lending to businesses changing from an over-reliance on single-source finance – “While loans remain the core staple of financing, there are now more businesses using a package of finance – a mix of funding sources with debt underpinning them.”

Different types of finance suit different types and sizes of businesses. Nolson explains: “The type of finance you use really depends on what you’re trying to achieve: what stage of growth you are at; how much flexibility you need; whether you want the finance on or off your balance sheet; and how to match the right type of finance to your growth plans, assets and liabilities.” Understanding the full range of finance solutions available to your business can help you unlock new opportunities.

New types of finance

Early-stage and pre-launch businesses can explore crowd-funding sites, which see large numbers of people invest as little as £10 (via an online transaction) to later receive a product, discount or service. The funding can be significant – 3D-printing pen Lix recently raised £300,000 in just one day, and Nesta estimates that crowd-funding could deliver as much as £15bn annually to businesses in the future.

SMEs might also want to explore peer-to-peer lending services such as Funding Circle, which offers business loans funded by thousands of individual investors. There is also the Enterprise Finance Guarantee Scheme, a loan guaranteed by the government, available to SMEs that might not have the assets necessary to secure a traditional bank loan.

Retail bonds are a relatively new type of finance, but some businesses have used them effectively, such as John Lewis and a handful of mid-market corporates. Retail bonds see customers investing in bonds from the company and getting either an annual return or another benefit provided by the company. They tend to suit more mature SMEs as they can be complex to administer.

Traditional financing options

Asset finance could be the key to acquiring the new machinery you need to take production to the next level, or to getting the fleet you need to expand your sales team’s regional reach. These might otherwise be expenditures that feel unachievable because they are such big capital investments.

However, asset finance can allow you to diversify funding for other ‘assets’ such as hardware and office equipment, allowing you to preserve your capital while still building the infrastructure you need to grow.

If you’re struggling with cashflow because you’re not being paid promptly enough or are growing very quickly, receivables financing options such as factoringmight be a good solution for your business, as it advances most of the cash tied up in outstanding payments to you. This option also shifts the burden of chasing late payments to a trusted third party, easing your team’s workload.

Invoice discounting works in a similar way to factoring, although you retain control of chasing payment and it is typically confidential and therefore invisible to clients. Invoice discounting has become an increasingly popular option for businesses, growing in the UK from a total sales value of £34bn in Q1 2006 to almost £63bn in Q4 2013, according to figures from the Asset Based Finance Association. Receivables financing is no longer seen as an alternative form of financing and has moved to the mainstream, “It actually helps fund businesses’ growth and is now very much a front-foot tactical type of finance, which speeds cash up through the business, which in turn can support organic growth, acquisitions or other key events.” explains Nolson.

Planning ahead

And those options are only the beginning – as well as the solutions above, there’s also supplier finance, equity finance, non-bank lending and also a number of Government-backed schemes, to name but a few. To stay abreast of the full range of alternative finance options that can aid growth, business owners and managers can talk to experts who understand this diverse market. That’s where the bank comes in.

Banks are there to provide guidance and ideas on what type of finance might best suit a business’ future plans. “Alternative finance options work most effectively when the bank is brought to the table early,” explains Tony Reynolds, Co-head of Mid-corporate, Barclays. “When business managers tell us their plans for the years ahead, we can help inform strategic growth decisions by helping them understand the specific types of finance that are available to realise those plans. The earlier they talk to us, the better able we will be to help them achieve their ambitions.”

Make the right connections, get the right support

Experienced bankers can also make suggestions about types of financing that they don’t themselves offer – and they are not biased towards any particular financial product, or limited to only explaining their own services and products. Reynolds explains: “We can introduce a business to someone very useful to them long-term, like a private equity firm or another fund, because we see this as a long term relationship with our client.

“These growing businesses are our future as much as they are their own future. The better we help them grow, through whatever means, the better off we’ll all be.”

Produced in partnership with Barclays