By Ian Morrison, director of underwriting and risk at Liquid Finance
For small businesses, and particularly microbusinesses, securing funding is a credible and positive way to grow your business. But, if like many business owners, you don’t have a background in finance, knowing where to go, who to approach, not to mention understanding the complex language & terminology, the process can be time consuming, confusing and pretty painstaking.
So, what are the funding options for small businesses? What are the current ‘buzz’ words and what do they actually mean?
To start with, it’s useful to understand the basics – i.e. the difference between secured and unsecured lending:
Unsecured versus secured loansAn unsecured loan is issued and supported by the business’s creditworthiness, rather than collateral - your house for example.
In contrast, a secured loan requires the borrower to pledge an asset – usually a property or equipment as collateral for the loan, which offers security for the lender.
When it comes to routes for funding, the options are plentiful:
Traditional bank loan
Most of us are familiar with this traditional funding route. Whilst dependable, it can be a challenging process for small & particularly micro businesses, as you need to demonstrate a tangible value to your business and typically need to borrow against an asset. It’s also worth considering that the money can take up to 90 days to reach your account – a time period many businesses cannot afford to wait.
A popular option at the moment, crowd funding is ‘the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.’ There are various crowd funding platforms where SMEs / consumers can safely request money and funding typically comes from the general public who see value in your business proposition. Whilst businesses can raise funds quickly and most crowd funding offerings don't involve an ‘ownership’ stake, there does need to be a return for those that have invested.
Peer to peer lending relates to cash-rich investors bypassing banks and lending directly to borrowers, commonly via online peer-to-peer lending platforms. The lender achieves higher interest rates and the borrower can benefit from rates that are more attractive than a bank. However, the loans are generally unsecured, which needs to carefully considered. Peer-to-peer lending (or P2P lending) is also known as social lending and lend-to-save.
Business accelerators/business angels
Accelerators offer investment to support the early stages of business development. The funding usually comes from cash rich individuals or a band of venture capitalists, seeking a return. For start-ups, this usually means giving up equity in the company. However, it’s not just funding. An accelerator usually offers access to technology, office space, mentoring etc.
Merchant cash advance
Perhaps the newest and most credible of the unsecured options, funding is secured against the business’s cash flow from debit and credit cards. Small companies can receive up to an average one month’s worth of card takings as an advance. A charge or fee is levied against this. The fee plus the advance is paid back as a daily percentage of card takings until all is repaid. This option is most applicable to micro businesses that take credit & debit card payments, and have a viable need to grow the business.
Government schemesThe government has proposed a number of initiatives and schemes that help UK small businesses grow & prosper.
The Start-Up Loans operation provides financial opportunities to fledgling companies but also advice on business plans and mentoring for ambitious entrepreneurs aged between 18 and 30.
Meanwhile, the Enterprise Finance Guarantee scheme continues to open up access to funding for SMEs in their third year of operations as they aim for growth. These targeted loans are available at a level of up to £25,000 and they’re designed to give viable small businesses a chance to raise the kind of finance they need to fully pursue opportunities in their respective sectors.
There is also advice and expert help available. The government has created what it calls the Growth Voucher Scheme that offers small companies ways to secure advice on key issues from finance and cash flow to recruitment and staff development, and from marketing to making the most of digital technologies.
With similar aims in mind, the government-backed Growth Accelerator scheme looks to provide support and guidance to SMEs that are struggling to maximise the growth potential of their businesses.