By Christina Nawrocki, Wellers Accountants
For most businesses, the principal source of funding has traditionally been in the form of overdrafts and fixed term loans, which account for about 50% of all external finance. The Bank of England has said that there is 'no real evidence of firms having difficulties accessing bank finance'. However, the need for some form of security can occasionally result in even the most well-presented request for funding, accompanied by an impressive business plan, being declined. And with over 40% of business funding being provided by hire purchase, leasing, trade finance (when financing international trading transactions the bank of the importer provides credit on their behalf), invoice financing (an alternative way of drawing money against your invoices), partners and shareholders, less than 10% is provided by venture capital sources.
Many lending institutions have developed 'credit scoring' techniques that assist them with small business funding applications. The determining criteria include credit history, past bank account management, the applicant's track record in business and willingness to invest their own money in the business, and evidence of repayment capability based on a business plan.
If an individual does not have a previous track record and has little or no capital, the application will focus on the entrepreneur's ability and willingness to provide some form of security against the borrowing. Equity finance is share capital invested in a business for the medium to long-term in return for a share of the ownership in - and sometimes an element of control of - the business.
One possible source of guarantee for finance is the Enterprise Finance Guarantee under which the Government will guarantee lending to viable businesses to ensure they can secure the working capital and investment they require. This scheme provides a guarantee for lending from three months to 20 years, to UK businesses of up to £25 million. This scheme is intended to facilitate the securing of loans between £1,000 and £1 million. This scheme is available to 31 March 2015.
Equity finance accounts for about 8% of external finance for small and medium-sized businesses. Those companies that do attract this type of funding tend to be highly innovative and have a prospect of good growth.
According to 97% of respondents to the Government's 'Bridging the Finance Gap' consultation, there remains a significant lack of equity finance available, but this is a source of funding that looks set to increase in the future.
There are reckoned to be 20,000 to 40,000 angel investors in the UK, putting between £500 million and £1 billion per annum into between 3,000 and 6,000 businesses.
You can find individual business angel (BA) investors, or syndicates, through BA networks in the UK and Europe. BA networks include:
- British Business Angels Association (BBAA)
- Beer & Partners
- European Business Angel Network (EBAN)
BA networks help companies find an investor who is right for their funding needs. They also give investors details of companies they might want to invest in.
The Government has announced its intention to launch a series of 'pathfinder' funds, based on the US-style 'Small Business Investment Company' (SBIC) model. These are to be known as 'Enterprise Capital Funds' (ECFs), and will involve the Government offering debt at a favourable rate of interest to privately owned and managed funds. An ECF would then be able to access private funds and offer these pooled funds to UK businesses.
Raising finance - the essentials
1. Choose the right financier - Learn about the various sources of finance and select those best suited to your purpose. If in doubt, seek our help.
2. Provide the financier with the right information - Make sure that you fully understand the information that the bank (or other financier) requires. This often means much more than basic financial projections. A financier usually needs to gain an appreciation of the business, the quality and depth of management and the key people involved.
3. Take professional advice - It is best to use the services of a professional when preparing and presenting your proposal. We can help you prepare a solid, detailed business plan that will attract financial support, and perhaps identify potential financiers who will meet your needs. A well-prepared proposal presented to a carefully chosen lending source will have a greater chance of success. It is worth investing enough time, preparation and effort to get it right.
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