Director logo
When the bank says no
by Peter Bartram

So the bank manager has knotted his brow, given you a hard stare, and said "no" to your heartfelt request for a loan or overdraft to finance your business. You're not alone. The government's much-publicised attempts to persuade banks to lend more to businesses are failing, according to the most recent Bank of England figures. Commercial banks took back from companies £6bn more than they lent in April and a further £3.4bn the following month. But if the bank manager is a lost cause, your business isn't. There are (at least) 20 other ways you can raise much-needed cash for your company...

1. Put in more equity
This is the traditional route for a small and medium-sized enterprise that requires more capital. Directors have taken out second mortgages, cashed in insurance policies, even driven their credit cards up to the limit to find extra cash to steer their companies through tough times. None are ideal, but it's now harder than ever to persuade third-party investors to part with their money.

One organisation that helps directors develop skills for raising cash is Gateway to Investment (g2i). "We aim to help directors understand their business from an investor's perspective," says Ian Shields, programme director. Since 2006, g2i has helped more than 30 companies raise over £30m.

2. Borrow from a building society
If the bank has turned you down, why not try a building society? The Building Societies Association says it doesn't collect data on commercial lending. But some of the 53 societies that haven't turned themselves into banks—Britannia, Leeds and Principality are just three—will lend on commercial properties.

So taking out a mortgage or extending an existing mortgage on commercial premises is one option if your business is temporarily strapped for cash.

3. Badger family and friends
Family firms account for 65 per cent of the UK's private-sector businesses. Borrowing from your family and friends means you can build more flexibility into financial arrangements. But any deal needs to be properly documented to satisfy HMRC—and to avoid family bust-ups later.

Simon Pearson and Russell Venvil each borrowed £30,000 from their parents to start Sirus Automotive, a Midlands company that converts family cars for use by disabled drivers. The company now employs more than 35 people, but Pearson admits: "We were down to the last £1,000 before we banked the cheque from our first sale."

4. Seek venture capital
A common route for a growth business with good long-term prospects. A new £150m venture capital fund-of-funds, announced by Gordon Brown in June, could remove the blockages preventing smaller companies accessing this type of finance.

The government plans to channel the money through larger venture capital firms that will, in turn, lend it to SMEs. These are likely to be early-stage companies, typically with around 15-20 employees. This sort of deal could be an option for businesses, especially in technical areas, looking to raise £10m-£15m. Simon Walker, chief executive of the British Private Equity and Venture Capital Association, wants ministers to make sure the money starts flowing soon. "If they act swiftly and decisively, then this investment will produce exceptional returns," he says.

5. Go for a flotation
Not for the faint-hearted because of the considerable work involved. And not an option for companies that don't have a strong investment story to tell. Initial public offerings are at a low level because of a general shortage of investment funds. In fact, the London Stock Exchange's AIM market lost 228 companies last year.

The exception to the gloom is the Plus market, mainly for smaller firms. It now has more than 220 companies, with more applications in the pipeline. It is feasible to float on Plus with a market capitalisation of £2m or less, although some businesses have much larger values.

6. Search for a business angel
If you're looking to raise thousands rather than millions, a business angel may prove a better bet. Individual angels invest between £10,000 and £1m in a company, says Anthony Clarke, chairman of the British Business Angels Association (BBAA ) and an angel investor himself. There are around 18,000 angels in Britain, but such is the demand from SMEs for investment, the BBAA is campaigning for more.

Angels generally seek 10 times their money back over four to six years. So, Clarke points out, your investment proposition should answer the angel's most pressing question: how will the business make significant returns from my investment?

7. Raise money online
Zopa, an online marketplace for borrowers and lenders, has just launched a scheme for older entrepreneurs, aimed at business owners who won't see 50 again. The scheme is run in association with the Prince's Initiative for Mature Enterprise (PRIME), which checks business ideas for viability before they're posted on Zopa.

Then lenders bid for the opportunity to stump up the cash. The first person to have used the scheme is Cecile Trijssenaar, who borrowed £13,000 at 9.86 per cent APR to set up a dating agency.

8. Hunt for special funds
One such fund is the UK Companies Financing Fund, which was set up by M&G, the Prudential's asset management arm, in July. Prudential has put in £500m and it hopes to raise a further £500m from other investors. If your bank won't roll over an existing bank loan, the fund may be able to help. "We will be selecting stable, solvent companies with financing needs who have struggled to get loans from banks," explains Bernard Abrahamsen, director of fixed income at M&G.

9. Look for a soft loan
If M&G won't play ball, perhaps one of the organisations that offer "soft loans"-a loan with lenient interest costs and repayment terms-may be be able to help.

First try the Enterprise Finance Guarantee scheme run by the Department for Business Innovation & Skills. The scheme backs bank loans ranging from £1,000 to £1m for between three months and 10 years, but only for companies with turnovers under £25m.

No joy? Then check out the Carbon Trust but ensure your business plans demonstrate "innovation either through a step-change in technology design or in the application of a technology process".

10. Plead with the taxman
Often the worst moment for cashflow in SMEs is when tax falls due for payment. Pleas for time to pay used to fall on deaf ears—but no longer. More than 157,000 businesses owing £2.7bn in tax had already taken advantage of the HMRC's Business Payment Support Service by the end of June.

11. Apply for a government grant
A financing option only for those who can cope with endless paperwork and wading through bureaucracy. Even so, there is money out there to support activities such as innovation, training, and research and development. But because the grant landscape is strewn with procedural boulders, it's a good idea to start by seeking advice from a support organisation such as Business Link.

12. Consider asset-based finance
If you can't get loans or grants, you need to think about ways to make your use of capital more efficient. One way is by looking at asset-based finance. "With liquidity and availability of corporate finance almost non-existent, companies and advisers have discovered the benefits of asset-based lending as a means to secure medium-term financing," says Kate Sharp, chief executive of the Asset Based Finance Association (ABFA). These days asset-based finance is more flexible than ever. It's not just about plant and machinery—think about brands and stock, also. Consider, too, the funding of forward income streams, so your business can promote "buy now, pay later" deals, a strong marketing message when customers are short of ready cash.

13. Discount your invoices
"Invoice discounting is preferable to a loan when the requirement is for cashflow and/or working capital," says ABFA's Sharp. That's because, as turnover rises, so does the amount of cashflow, financed by discounting invoices. Expect to find discounters willing to advance around 85 per cent of the value of agreed invoices.

But Sharp warns: "Your invoice finance provider will have a closer relationship with you than would be normal under other forms of bank finance, so make sure you can relate well to the financier when making your selection."

14. Lease rather than buy
Another form of asset finance normally used by businesses with turnovers above £250,000. Consider leasing plant, machinery, commercial vehicles and IT equipment-the four areas that soaked up most of the £30bn advanced last year. But members of the Finance & Leasing Association (FLA) have seen business fall by a third since the recession started. "This reflects in part difficulties in obtaining funds to lend, in part the increased risk of lending and in part business decisions to defer investment," says Julian Rose, head of asset finance at the FLA.

15. Tap emerging markets
We're running out of options now, but there are still a few more esoteric sources of finance. For example, tapping emerging markets for funds. But that may mean selling all or some of your business to overseas interests, not to every British director's taste.

Investors from emerging markets acquired 256 western European companies in 2008, says a report from consultants PricewaterhouseCoopers.

If you're making luxury goods, you may find a Russian investor. Indian financiers are interested in companies with good distribution networks, while Middle Eastern investors seek prestige brands and Latin Americans look for "geographical bridgeheads"-in other words, a marketing foot in the door.

16. Save a student loan
If you're planning on starting a business when you quit university, save some of the loan, which comes at a low interest rate and generous repayment terms. Steve Burford started his Wealthystudent website, which offers advice on everything from tackling debt to part-time jobs, with £10,000 partly saved from his loan while studying at Southampton Solent University.

Burford is something of an expert at finding unusual sources of finance. He raised a further £5,000 by winning a magazine competition and also received help from the Student Placements for Entrepreneurs in Education (SPEED) scheme, which is designed "to provide students with the skills and knowledge they need to start up their own businesses".

17. Ask for a European Union grant
If you can't find money in the UK, perhaps you could be first in the queue for the EU's Progress Microfinance Facility. Bad name, good idea. The PMF will advance loans of up to €25,000 (£21,200) for businesses with fewer than 10 employees or people who've lost their job and want to start a business. But first the plan must creep through the Council of Ministers and the European Parliament. So money won't be on the table until next year.

18. Raid customers' pockets
Will King is growing his King of Shaves business by selling 5,000 £1,000 bonds to customers. The Financial Services Authority-approved bonds will pay six per cent interest a year for three years.

If you can't raise money directly from customers, make sure they're not raising cash from you by delays in paying your invoices. Companies that operate an efficient "purchase-to-pay" process save on working capital by getting customers to pay sooner.

19. Cut staff pay
Only a couple of years ago such a drastic move would have caused a walkout in most companies. Now workers are at least willing to consider the option if they think it will help to save their jobs.

Since Willie Walsh, British Airways' chief executive, mooted a pay cut, more than 7,000 staff have signed up. And more than 800 have said they'll work a month without pay. Other firms are trialling schemes such as offering staff more unpaid holiday or sabbaticals.

20. Take the final way out
Failed with all the previous ideas and can't think of any others? Then there's probably only one exit route—a "pre-pack administration". This controversial procedure is available only if you can demonstrate that you've evaluated every alternative, such as a company voluntary arrangement, creditors' voluntary liquidation or trade sale and found them wanting. But you should take specialist legal and accountancy advice before proceeding with this option.

A pre-pack is intended to rescue a viable business from a burden of historic debt. And sometimes it does. But the creditors you've dumped won't thank you for it.

What do you think?

Send us your views
Reshma Sohoni, Seedcamp, replies:
I read Peter Bartram's article with interest. What a wake-up call for very early stage businesses trying to get off the ground. It's often said that a recession is the best time to start a business. It keeps you firmly focused on delivering a product people genuinely want, with realistic revenue models. Raising money is no mean feat. But for the true entrepreneur, with a combination of courage, ambition and determination, there are options. The European start-up scene needs to focus on supporting the entrepreneurial spirit. Mentorship and contacts are often just as important as the money. For anyone thinking of starting a business, I would encourage you to look at the programmes that exist to help. Sometimes it is just a matter of knowing where to look.
Peter Ewen, Venture Finance, replies:
I would like to reiterate how invoice- and asset-based lending has been helping thousands of UK businesses stabilise over the last few months. Our research among 1,000 UK accountants showed 60 per cent reported an increase in business owners seeking to learn more about 'alternative' methods of funding, after being refused credit from traditional sources. Many businesses have also been guarding themselves with bad debt protection to cover against unforeseen customer insolvency—we have seen take-up of this service increase. Businesses today need robust, responsive and reliable means of funding—a back-to-basics approach and shift of emphasis from cost to service. It's time to shed the misleading term of 'alternative' funding and shout louder about its key advantage.