As banks squeeze lending, small firms must look further afield for finance. From crowdsource funding to asset-backed loans, we look at the options and ask whether they're here for the long run or simply plugging the gap
Bubble & Balm, launched in 2009 by former banker Sue Acton, has carved out a niche as a supplier of Fairtrade bodycare products. With contracts to supply Waitrose and Planet Organic, you might assume that raising additional finance would be straightforward. "The expectation is that once you have an order from a leading supermarket, the bank will be willing to provide the finance to move the business forward," says Acton. "In fact, it is very hard to raise money in the current climate."
Having failed to secure funding of £75,000 from her bank, Acton has turned to an innovative and largely untested finance source. Earlier this year, she pitched her business to investors through an internet-based community known as Crowdcube. Since then, she has watched an increasing number of the group's members pledge money.
The concept behind Crowdcube is simple. Investors sign up and place cash in an account. Their deposits, ranging from £100 to thousands of pounds, can then be used to invest in one or more of the companies that have joined Crowdcube. If the fundraising is successful, a business might find that it has acquired hundreds or even thousands of shareholders.
Crowdsource funding is one of several alternative techniques that are rising in popularity as bank lending remains constrained. Some of these sources, such as crowdsourcing, are genuinely new while others, asset-based lending for example, are coming into their own following the recession. Meanwhile, there are various government-backed cash sources aimed at providing funds for SMEs.
A growing range of finance options should be good news, but as Manos Schizas, a senior policy adviser at the Association of Chartered Certified Accountants (ACCA), points out, new sources of funding won't necessarily make it easier to raise money.
"Essentially, we are looking at two sorts of growth funding requirement," he says. "On one hand, you have mature businesses planning moderate growth. These are likely to be cash-positive relatively quickly. Then you have companies promising explosive growth in the longer term, but they may be cash-negative for some time. You must match the source of finance to the type of company and its requirement."
The upshot is that any alternative funding needs to be assessed in terms of whether or not it is appropriate for your business in the economic climate. So what's on offer?
Crowdsource funding
Crowdsource funding focused initially on helping individuals find backing for worthwhile or interesting projects, often in the arts. For instance, US site Kickstarter specialises in helping artists, film-makers, musicians and journalists find money for projects.
As Richard Welsh, head of development at UK film production company Bigballs Films, explains, crowdsource funding can be an efficient way to secure funds. The company used Kickstarter to raise £7,500 to make a short film about the aftermath of cluster bombing in Laos. "The aim now is to raise £500,000 to make a full-length film," says Welsh. "It is possible to raise significant sums, and it will become easier as more people find out about it." But crowdsource funding isn't limited to good causes and arts projects. Latterly, the idea has been adapted to provide a more conventional corporate finance solution. For instance, Crowdcube operates rather like an angel network by allowing members to invest in return for equity.
Founder Darren Westlake says it opens up direct investment in businesses. "It's aimed at people who might watch Dragons' Den and think they would like to invest. They may not have £50,000, but if they have £50 they can make an investment," he says.
So unlike investment secured through an angel network, a company might find itself with many small investors rather than a few significant shareholders. And, according to Acton at Bubble & Balm, there's another key difference. "If you want to access an angel network, you often have to pay a large upfront fee," she says. "That's not the case with Crowdcube."
Funding Circle offers a variation on the theme. This UK-based platform allows members to lend money to businesses at an agreed rate of interest. Relatively small sums advanced by individuals potentially add up to a much larger total. Since launching last August, the community has lent about £17m.
As well as underwriting checks on applicant companies and bringing together investors and businesses, Funding Circle also manages the lending and repayment process. A company that secures a loan makes one payment every month, which is then divided up between lenders. In addition, Funding Circle has set up a secondary market that allows lenders to sell debt to others. The liquidity provided encourages people to take part, but it's not for everyone. "We don't do start-ups," says founder James Meekings. "What we are about is providing growth."
But how much can you raise through alternative funding? With Crowdcube, the model has yet to be proven. To access cash pledged by investors, companies must raise the full amount sought, and deals can take months to complete. So far, Acton has raised 12 per cent of her £75,000 but she is satisfied with progress. Meekings says Funding Circle loans range from £5,000 to £75,000.
> Advice Hurst's Andrew Judson says "banks are requesting more detail than ever. It's essential business owners can provide as much information as possible about the financial wellbeing of their business; open and up-to-date knowledge is key. Businesses that are doing exceptionally well can still miss out if they don't have the information to support their success."
Loans and card payments
Also new to the UK is the US concept of microfinance secured against credit and debit card receipts. The concept is simple. A company that needs cash to buy equipment or stock up on inventory ahead of a busy trading season borrows a sum that is repaid every time a customer makes a card payment.
For instance, each transaction might see 20 per cent going to the lender until the debt is repaid. "The aim is to provide small businesses with the cash they need to grow—cash they wouldn't otherwise be able to access," says Richard Morley, co-founder of Merchant Cash Express, which has brought the product to the UK under the Business Cash Advance brand.
The target market is consumer-facing businesses, such as shops, hotels, garden centres and restaurants. Morley reckons the big advantage for the borrower is that repayments are directly linked to incoming revenues. "Repayments move with cashflow," he says. In other words, if trade is good the loan is paid off quickly. If business doesn't move quite so well, the debt is repaid over a longer period. Loans range from £3,500 to £100,000.
Clearly the lender will require assurance, and Morley says Merchant Cash Express checks the previous Epos (electronic point of sale) receipts of businesses before money is advanced. "We look at statements for the past 18 months," he says. "Although we do take into consideration cyclical ups and downs of seasonal businesses."
Collin Brown, owner of the Chef Collin Brown restaurant in east London, has taken out three Business Cash Advance loans to buy equipment for his restaurants and also to develop an iPhone app. "I couldn't have built the business and secured an AA Rosette without it," he says. "The bank wouldn't lend me the money and without funding from Merchant Cash Express, I couldn't have bought the equipment I needed while also having the money to hire enough staff." Brown sees the unconventional repayment method as a virtue rather than a problem. "You don't actually notice the repayments," he says.
Asset-backed lending
Asset-backed lending (ABL) has long since moved into the mainstream of corporate finance with High Street banks offering factoring and invoice discounting to business clients. But the ABL market is also home to specialist providers that focus exclusively on lending against assets rather than also providing clearing bank services and more traditional loans.
There can be good reasons for seeking finance from an ABL company rather than applying for a similar product from a High Street clearer.
When gravure printing company Discovery Foils made an offer for a foil printing plant operated by aluminium rolling company Novelis, the vendor wanted the deal completed within a tight deadline. That meant putting a financial package together rapidly and although Discovery Foils was happy with its clearing bank, the need for a quick decision prompted it to source funds from ABL provider Venture Finance.
"Our bank couldn't make a decision quickly enough so we chose Venture," says Discovery Foils director Chris Wrigley. Venture Finance executive director Alison Small says the appeal of ABL providers is partly down to service levels, with staff-to-customer ratios typically being better than in High Street banks. By accessing funds through an ABL specialist, companies can often increase the amount of money available to them. "You can have some of your finance through the bank and some through an ABL provider," says Small.
Other debt-based forms of funding include supply-chain finance, where a key customer takes advantage of a good relationship with a finance house to provide funding for suppliers, and SME bonds. Supply-chain finance enables suppliers to access funds from a bank ahead of an invoice being paid by the customer, and is potentially good news for cashflow.
Manos Schizas at the ACCA says SME bonds have yet to make an impact. "Raising money via bonds means going to the market and there is a cost to that," he says. "The general rule of thumb should be that costs shouldn't be more than 10 per cent of the money raised, and that has limited uptake of bonds."
> Advice Alexander Baldock, managing director at Lombard, says asset finance offers fundamental benefits to businesses. These include more control over cashflow and the preservation of working capital, greater access and flexibility. While it is becoming increasingly popular in other European countries, it only accounts for 20 per cent of funding in the UK.
Government help
The government emphasises hi-tech and innovative industries as well as green technology, in its efforts to revive the economy. It is heavily involved in sponsoring activities in this area. A high-profile example is the nascent Green Investment Bank, which-drawing on private funds-will invest in companies active in the low-carbon economy.
Innovative businesses in all sectors may be able to take advantage of grants available from other sources, including the Technology Strategy Board, which offers proof of market, proof of concept, and prototype development grants. VoxGen, a provider of a system that allows you to pay bills or make inquiries by talking to a computer rather than a human, has secured £215,000 to research biometrics to support consumer identification and verification.
The grants must be matched with funding from the recipient and, as VoxGen chief executive Simon Loopuit points out, it's vital to be certain that the research the cash is funding will take the business in the right direction. "We don't see it simply as a source of money," he says. "We will only apply for grant aid if it can be used for something that will be beneficial."
Finance South East is one of several public/private fund management organisations that provide investment for areas such as proof of concept and business development.
Chief executive Sally Goodsell says the range of funds is designed to help businesses from start-up through to later stage finance but she concedes that the criteria can be tight. "It is still easier for companies to access funding if they are using genuinely new technology rather than applying existing technology in an innovative way," she says.
So the good news is that there are more alternative sources of finance than you might think. The bad news? Well, some of them, such as crowdsource funding, have yet to be fully tested and others can be hard to access. As with more traditional types of finance, it's important to look closely at the source and decide whether it is appropriate for you.
What smes say
"The lack of finance for small business at sensible rates is the single most important impediment to the British economy continuing to grow"
William Chase,
Chase Distillery
"It is very hard to raise money in the current climate"
Sue Acton,
Bubble & Balm
What the analyst says
"Banks remain sensitive to risk... funding is still scarce. Businesses might be seeking new providers but if their financial records aren't transparent and up to scratch they're giving banks an open invitation to turn them down, make a reduction to their facilities, or demand greater security"
Andrew Judson, Hurst
What the politician says
"Lending to businesses has contracted. And the Bank of England has found that for some SMEs, banks have been seeking to replace overdraft facilities with alternative, more expensive, credit products"
Ed Balls, Labour's shadow chancellor, at the IoD Annual Convention
What the banks say
"Understanding what British businesses need to help them grow and exploit emerging opportunities will cover much more than just financial support. It is about really getting under the skin of businesses-understanding what makes them tick and what challenges they face"
Colin Fyfe, divisional director for Clydesdale and Yorkshire Banks' iFS business and private banking division
"There's no doubt that there has been some tightening of lending criteria in some industry segments, which reflects the increased risk in a recessionary period. From our perspective the issue is largely demand-led. My application volumes are about four per cent down on last year but about 20 per cent down on 2008"
Andy Grisdale, head of strategy at HSBC commercial banking
