New start-up and early stage businesses are like ‘acorns are to oak trees’ for the UK economy. All successful businesses were start-ups at some stage and it is vital to the future of the UK economy that entrepreneurs continue to create new start-up businesses. It is, however, a sad fact that after 5 years only 40% of new-start businesses are still trading. According to the Office for National Statistics [ONS] the biggest reason for business failures is:
Insufficient investment and working capital finance
For many businesses the well-known dictum “cash flow is king” certainly rings true, especially for SME’s and start-ups. I emphasise the smaller businesses as often larger enterprises will be able to rely on the pure size of their business and/or unencumbered assets to obtain credit.
Now, whilst cash may be king, getting your hand on it can be a big problem! For example, the less history you have, the more difficult it is to raise that loan you need to grow the business. In many cases, particularly for early-stage businesses, the only way to persuade a ‘Lender’ to provide a Loan is to offer some significant security against it. Often this will be property based unless the business itself has already acquired sufficient ‘unencumbered assets’.
In the findings of a survey conducted in the Spring of 2021 by Ipsos Mori, on behalf of the British Business Bank [BBB], to research opinions on Access to Finance for SMEs in the UK, one of the key findings was:
The lack of awareness of the range of finance options available.
This comes as no surprise to anyone involved in the commercial finance world as changes over recent years have created a totally different landscape to the funding choices now available compared with the past. There was a time when the only realistic option of raising money for a new business outside of its own resources and friends and family was to ask the local bank manager for either an overdraft or a loan.
Traditionally banks did not expect to back new business ventures with all the monies required but were invariably receptive to backing viable propositions where the founders were inputting some of the funding requirement and/or providing security for the facilities requested. The landscape was very different then, with local bank managers having their ‘ears very firmly to the ground’ and they were invariably the first point of referral when entrepreneurs asked their accountant, solicitor or advisers where they should go to raise funding for their business.
It was probably some 40 to 50 years ago, with the advent of the original ‘alternative finance’ options coming to market, commercial finance brokers became established and accepted as part of the funding landscape. Initially these brokers focused on the property and asset finance sectors where they ‘packaged’ funding applications and presented them to the funders. However, the biggest change in the brokerage market has been seen since the 2008/9 banking crisis.
The funding landscape has dramatically changed due to a significant growth in the choice of funding types available to SME businesses. This has been driven largely by the new funders looking to move into areas where the banks have been less focused due to concentrating on repairing their balance sheets.
In a way, this is potentially very good news for the start-up or established SME. The problem lies, however, in the sheer diversity of funding options that now exist (note: I do not say ‘are available’ as many of them will have parameters & conditions that some businesses cannot meet). Who are these ‘alternative’ funders? What type of finance do they provide? How do we qualify?
Equity Investment, crowdfunding, unsecured loan-based crowdfunding, rewards-based crowdfunding, spot factoring, merchant cash advances, pension-led funding, Government start-up loans are just some of the types of funding that have grown significantly in terms of availability over the last 10 years. The creation of the British Business Bank [BBB] in 2014 to take on all financial schemes previously controlled by Capital for Enterprise Ltd. has also impacted on the funding landscape. The BBB do not, however, lend to SMEs directly. Instead they work with ‘distribution partners’ i.e. other financial institutions, to increase access to funding principally by providing part guarantees for loans.
Thus it is easy to see the argument for employing the services either of an experienced broker or possibly an accountant, if you can find one who has broad knowledge of the many types of finance as referred to above.
Worth mentioning also that there is now a new source of free information on the many types of finance available to small businesses. This is ‘The Finance Guide’ that can be accessed by registering to download from the www.startuppack.co.uk web site. Highly readable and very informative.