Accessing funding can be problematic for many businesses. In almost every case, access to finance is going to depend on your business’s track record. If you have a good financial track record repaying loans for example, and you can clearly demonstrate that you have the means to meet your liabilities, you are likely to be in a strong position. If however, you are already at your borrowing limit, have CCJs or statutory demands against your record, more traditional forms of finance are much less likely to be available to you.
So what can you do? There are a number of finance options on the market for businesses in your position.
The best solution for your business will depend on a number of factors, including time constraints, your business’s credit history, your client’s credit history and how much money you need, for how long. Here we discuss several options available to struggling businesses, in terms of how those options work might work for your business, and the factors that can influence lenders’ decisions to lend.
This is a fairly recent form of lending where you borrow against the invoices that you issue, using your invoices as assets. In brief, if your clients have a good history of paying in full and on time, and if it suits your business cycle and ethos, this can be a quick and relatively straightforward way of accessing sums of cash. Read more about the pros and cons of invoice financing.
If you’ve paid off significant portions of any HP agreements, you can use the equity in the assets to access funding. In these circumstances, the refinance company will usually pay the balance of the hire-purchase agreement owing and take charge of the asset. Typically, you could borrow up to 70% of the item’s overall value.
Like invoice based financing, this can be a relatively quick way of accessing money. It can be very useful for addressing genuinely short-term cash flow problems. It could also be used in conjunction with invoice based financing, for example. However, it can be an expensive form of financing, due to high interest rates.
Similar to crowdfunding (see below), peer to peer funding connects businesses with individual and corporate investors via online platforms. In contrast with crowdfunding, however, which is usually equity based lending, this is interest based lending. Peer to peer lending usually offers investors much better rates of return than high street banks offer on traditional savings. It categorises investments by risk, so riskier investments will offer higher returns and vice versa. Read more about peer-to-peer lending.
Online platforms have various criteria for accepting business pitches. However, most rely on publicly available records such as your filed accounts and credit checks. Once you pass the initial stage, whether your application is accepted or not, and the level of interest rates you’ll be offered will rely on how well your business plan is received.
Another relatively new and growing form of funding. Like peer to peer funding, this is significantly more time-consuming than either of the first two options. It’s usually equity based and uses online platforms to connect business with both individual and corporate investors. Well known examples include Crowdcube, Seedrs, and Crowdfunder.
For crowdfunding to be successful, you’ll need to be able to make a successful pitch for your business or project ideas, and this takes time and skill. You need to be able to make a very convincing business case, both to be accepted onto the site in the first place, and then to attract investment. Once accepted, you’ll be pitching at both individuals and companies – some projects will attract a handful of investors, some hundreds – so you need to provide substantial yet engaging information to attract and secure investment.
This is a scheme initiated by the Department for Business, Innovation and Skills in 2009. It guarantees up to 75% of the value of a loan for viable UK businesses that have been refused mainstream forms of finance due to inadequate security or a proven track record. It’s managed by the British Business Bank, working with a number of regional delivery partners. It’s up to the regional delivery partners, or lenders, to assess your business’s suitability for access to the scheme.
Enterprise finance guarantees can cover traditional loans, as well as other forms of financing such debt consolidation, refinancing, invoice finance or revolving facilities such as overdrafts.
In general, guarantees will cover loans of between £1k to £1.2m over periods of 3 months to 10 years, according to loan value. Terms for overdrafts, invoice finance and other revolving facilities are between 3 months and 3 years.
Like bank loans, this form of funding is subject to various eligibility criteria. It can be a fairly slow process, and it can rarely be used where businesses need to consolidate VAT or PAYE arrears. Though the government acts as guarantor, it’s also common practice for the lender to also ask for personal guarantees for substantial or whole parts of the loan.
If your business is unable to access finance, but you are, you may choose to take out a personal loan that can be loaned to the company. If the company is able to repay the loan, this can be a satisfactory way of accessing funding. However, if there is risk of insolvency, you need to consider your options very carefully. The company will not be able to repay your loan in preference to other creditors if it enters formal insolvency, and there are strict legal guidelines (and consequences) pertaining to this.
The key restrictions that you are likely to face accessing finance will relate to your business’s financial track record, and the time pressures that you are under to find money. The best preparations you can make for making your case to almost all funders will be to draw together detailed and coherent paperwork that sets out your position and supports your plan.
If you need assistance with this or would like to discuss your options with one of our business rescue experts, don’t hesitate to make an appointment, or contact one of our experts directly.