Money (7)

UK business owners have more funding options open to them than ever before – at least that’s the theory. However, as anyone currently on the hunt for cash to grow their firm knows, the reality can feel rather different.

Recent figures from the British Bankers’ Association found that bank lending to the capital’s small firms plummeted 40 per cent in 2015. But the same report also points to an alternative finance boom, as London’s small businesses raised an estimated £350m through peer-to-peer (P2P) lending throughout the same period. New options can’t come fast enough with 38% of UK small and medium-sized enterprises (SMEs) reporting their growth is still being stunted by insufficient access to funds.

The increasing diversity in the small business finance marketplace is great news for small businesses. Yet in the midst of all this industry disruption, securing the best deal for your particular situation can be a little more challenging than the days when all business owners had to do was visit their bank manager.

Here are my top tips for small business leaders trying to navigate the new funding market:

  1. Understand the alternatives
Arm yourself with information about the range of funding options on offer, including the new alternatives. There are some good start-up funding guides available online and platforms like Funding Xchange may make it easier to compare products.

Every funding avenue carries pros and cons. Choosing the right one involves considering the particular stage you’ve reached, your growth ambitions, your risk profile and gauging how long it will take for whatever investment you’re making in the business to start paying off in terms of profit.

The answers to these questions can help you figure out whether you should be looking for some form of debt finance or equity investment. Then you can start investigating some of the new products alongside their rates, timelines and responsibilities to whittle down the options.

  1. Seek advice
Researching different funding options can be particularly difficult for people who are notoriously short of time, but there’s no need to go it alone.

Your accountant should be a great starting point. As well as taking care of the basics like books and tax, many accountants play the role of an outsourced financial director for small firms. What’s more, some have a good network of funders for firms to tap into. This can help business owners increase their chance of securing the right type of funding, and on the right terms.

  1. Decide how much you need and why
Before you start speaking to funders, be clear on two things: 1) how much you need and 2) what you need it for. Devising a strategy can help you narrow down the options and prepare you for the questions they will inevitably ask.

When applying for a loan, know exactly what the money will be used for and the level of repayments your cashflow situation will comfortably accommodate.

This need for clarity goes as much for investors as lenders. Ask for too little money and the need for further investment rounds can damage credibility. Too much and you can out-price potential future funders.

  1. Know your numbers
As any Dragons Den viewer is well aware, knowing your numbers is crucial to a good pitch for funding. This goes for lenders as well as investors (albeit in a considerably less dramatic forum!).

At KPMG Small Business Accounting we recently interviewed small business leaders from across the UK, and found that the financial information they have access to is four months old on average. This can be a particular stumbling block for anyone seeking finance.

Whether you’re approaching banks, peer-to-peer lenders or private investors, an accurate picture of your company’s financial situation will inspire confidence. It’s worth thinking about how you might be able to present realistic and credible forecasts too.

In addition to accelerating the funding process, building a compelling case from solid financial information may even help in negotiating better terms.

By Bivek Sharma, Head of KPMG Small Business Accounting