Raising Finance for Start-Ups and SMEs

Raising Finance

Raising finance for your business? As a start-up or SME this can be difficult, however in our article we discuss the options you have available to you, outside of the bank. 

Financing has become a competitive business with the investors or institutions that own or manage these funds, having an obligation to be more responsible. Therefore, raising and securing a capital base for any business, particularly SMEs, is a challenge, but necessary for the advancement for even the greatest ideas to develop and grow.

Clearly these challenges to raise the necessary capital for whatever stage of the business are not all external; the entrepreneurs are not without responsibility in their lack of funds. Typical SMEs have, over time, displayed poor management as well as a poor maintenance culture of their current facilities. This has hampered their ability to raise or retain finance.

What are the options when considering raising finance?    

High street banks: They are the primary source of funding for start-ups’ financing debt. The market is changing with alternative sources arriving in recent years as the perception has been that banks are not lending. However, banks are certainly open for business, with sufficient area funding and bespoke solutions available for SMEs who have sound business ideas, direction and strong support teams.

Asset Finance: Hire/Lease Financing for new plant allows equipment to be purchased without the need for a large capital outlay from a limited cash resource. This provides flexibility to utilise cash resources efficiently to fund the current business operations or to ensure sufficient working capital exists to take on further contracts. However, this is unlikely to be an option for most start-ups, but one to be considered.

Invoice Finance: Invoice financing enables the release of liquidity currently tied up in outstanding customer invoices, again ideal for improving your cash flow injection for working capital management. The main types: factoring, discounting and spot discounting. This area of lending has become much more competitive, creating a much more affordable and flexible way of financing your business, with agreements normally built around a 30 day rolling contract.

Crowd Funding and P2P Lending: Generally online platform-based lending, enabling many small lenders to pool their cash investment collectively to enable enterprises to seek alternatives to banks. These funding pools will still set out to match their own risk criteria with that of the businesses seeking funds, and untimely the returns required on those funds invested.

The Business Angels: Very diverse in the UK, reflecting a range of models and approaches such as angel networks, small groups and syndicates; ideal for business owners looking for more than a funding solution, but also for strategic support and contacts.

Venture Capitalists and Private Equity: Essentially capital finance provided in return for an equity stake in potentially high growth companies.

Business Grants: This is a highly overlooked source of funding and broadly fits into one of three categories;

  • Government grants
  • European grants
  • Local grants

Each scheme has its own set of criteria to determine whether a business can be considered for this type of investment.

Friends and family: The cheapest form of finance, but with potential problems which may affect long-term relationships.

Other methods: Commercial mortgages, mezzanine finance and that all important internal working capital management.

Consideration like a poor credit score, a lack of personal guarantees and a poor financial management history, finance can be difficult to secure and a serious barrier for business owners. The business model or indeed the individual may be deemed a high risk due to a lack of trading history or sufficient asset base.

A high proportion of applications are turned down by banks, but mainly due to a lack of clear direction by the business owners or even a poorly assessed management support network. Understanding the requirements of lenders and being open to the range of finance options will enable SMEs and start-ups to overcome these financial hurdles.

Because of the Economic downturn globally back in 2008, lenders have had to become more responsible, thorough and forensic, and will now conduct their full due diligence. Alternative lending providers are competing with traditional mainstream bank lending facilities and offer much wider assessment criteria and measures.

How to assess your own viability: –

The business idea and plan

Investors and loan providers will want to review the business idea and plans, and assess the likelihood of profitability and return. A continually updated business plan is therefore essential.

Matching a lender to your own funding requirements

What financial option best matches the needs of your business. Some funding organisations and investors favour specific business models, so do your research to see if a funder has a history of investing in a particular sector. Also are you willing to dilute your own equity and control?

Is the entrepreneur ready?

People buy from people. Following the global recession, ensuring you can provide the business confidence, passion and the vison is all the more essential. Research your funding sources to ensure it is the best solution for you and the stage your business is at.

This provides a very basic outline. If you require any advice, whether you are just looking to start up or are a current business owner, please contact Raffingers.

Roy Butcher specialises in the SME sector and corporate finance. Contact him on roy.butcher@raffingers.co.uk or call him on 020 3146 1607. You can also follow him on LinkedIn.

For more business tips on how to grow, secure finance and run your business efficiently, you can follow our Twitter and subscribe to our newsletter.