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The days when bank finance was the only option for small businesses looking to borrow are long gone. But with more potential avenues to choose from, finding the right solution can be tricky. David Adams takes a look at what’s on offer
Businesses of all sizes, but particularly smaller companies, have had grounds for complaint about the level of finance available from the UK’s banks, and the conditions applied to the provision of this finance. The situation deteriorated even further following the 2007/08 financial crisis.
In total, 60 per cent of small firms used some form of external finance in 2015, up from 56 per cent a year earlier, according to the British Business Bank (BBB). But the SME Finance Monitor survey for the fourth quarter of 2015, produced by BDRC Continental, classes almost half of small firms as ‘permanent non-borrowers’, while three-quarters aspired to be debt-free. Yet external finance is often the key factor that lets businesses both manage cashflow issues and invest in growth.
In May 2016, the Competition and Markets Authority (CMA) published provisional proposals to improve competition in banking services for small firms, including measures to make it easier for them to compare products and prices and switch banks.
FSB will work with the CMA as it develops its final recommendations on market reform, to be published in August 2016, says Mr Baron. FSB and the CMA also recommend that firms use the website Business Banking Insight, which collects the survey data of 20,000 small businesses, to compare the quality of services that banks offer.
Asset-based finance, using leasing and hire purchase arrangements, grew strongly among small firms during 2015, with almost £15 billion of asset-based finance provided to SMEs, according to the BBB.
Meanwhile, invoice finance and factoring, generally used to fund day-to-day cash requirements rather than investment or growth, are becoming more cost-effective, claims Jeff Longhurst, Chief Executive at the Asset-Based Finance Association (ABFA), “because our members have so much money to put out – supply is outstripping demand”. Many ABFA members are banks.
Ming Foods, founded in 2005, provides Chinese pancakes to restaurants and food manufacturers. It turned to invoice finance provider Bibby Financial Services when a previous financial partner changed the conditions. Unfortunately, it did so just as Ming was moving from a 4,000 square foot factory to a 30,000 sq ft one.
“We’d just signed a 10-year lease on the new factory,” says Ming’s Chief Executive, Sam Duong. “Bibby said it could see what we were trying to do and it could help.” As well as a £300,000 asset-based finance facility, Bibby is also providing foreign currency services for the firm.
Peer-to-peer business lending increased by 75 per cent during 2015, according to AltFi Data. Applicants usually need to provide a trading history, sometimes including audited accounts, and meet minimum turnover requirements.
Crowdfunding grew by about 135 per cent – albeit from a low base – during 2015, according to the BBB – but only 1 per cent of small firms actually used these forms of finance last year, according to BDRC’s SME Finance Monitor.
There are three main forms: donation-based, lending, and equity funding.
Crowd2Fund offers lending propositions including revenue-based lending. One firm using this is Ruroc, which makes winter sports helmets, masks and goggles. Between the company’s first year of operations in 2010 and 2014, turnover rose from £100,000 to £1.1 million, says Managing Director and Co-Founder Daniel Rees.
The solution was almost 70 Crowd2Fund investors, who have now lent the business £167,000 at a rate of 10 per cent a year via a revenue-based loan, with the business paying back 4 per cent of revenue generated each month. Revenues fluctuate with the skiing season, so in November or December, for example, Ruroc may be paying back £15,000 or £16,000, but when things go quiet in the off-season the figure drops to around £2,000 or £3,000.
Only one per cent of small businesses used equity funding in 2015, according to the BBB, via various sources, including the Business Growth Fund (BGF). Established in 2011 to support small, growing businesses, BGF is backed by five big banks – Barclays, HSBC, Lloyds, RBS and Standard Chartered – and works through eight regional offices. It usually focuses on companies with a turnover of between £5 million and £100 million, making initial investments of between about £2 million and £10 million in return for a seat on the board and a minority equity stake.
“The companies we work with get support from BGF and our network to help them expand, in situations where there is more risk than a bank would be comfortable with,” says Alistair Brew, a member of the investor team at BGF.
BGF also has a venture capital arm, BGF Ventures, which may invest between £1 million and £6 million in firms at earlier development stages. Recent projects have included investing £2.7 million in toucanBox, a children’s activity box service, which was set up in 2012 and is growing at 20 per cent month-on-month.
The BBB works with 80 financial partners, including banks, alternative and asset finance providers, venture capital and private debt investors. It supports £2.5 billion of finance provided to more than 44,000 small companies. It also manages the Enterprise Finance Guarantee programme, which encourages lenders to work with firms unable to give the level of security a lender usually requires.
A new ‘Help To Grow’ programme, targeting high-growth smaller businesses, will be delivered with the assistance of private debt funds. “With private debt you have a fund that is not subject to the same capital regime as a bank, and those funds are looking for growth opportunities,” says BBB Chief Executive Keith Morgan.
FSB Financial Healthcheck has been providing unbiased, independent sound advice on personal and corporate finance for over 20 years.
National Federation of Self Employed & Small Businesses LimitedSir Frank Whittle Way / Blackpool / FY4 2FE. National Federation of Self Employed & Small Businesses Limited (FSB) is registered in England, number 1263540