Business finance: your options and the pros and cons

There are many options available for small businesses, so don’t be disheartened if your high street bank won’t help.

Gaining access to finance is regularly cited by business owners as one of their major challenges. But there are increasingly more options available to small businesses, far beyond just popping to your local bank. Here we consider the advantages and disadvantages of the most likely contenders.

Bank loans

For many businesses, the local high street bank is the first port of call. Of course, it’s worth a stop. But entrepreneurs regularly report disappointing experiences. Success can be something of a lottery, with some branches more receptive than others. Banks are mostly interested in lending money when the business owner can provide a personal guarantee, backed by an asset (such as property). In some cases, entrepreneurs really are asked to bet the house – and it’s the one they live in.

  • Pros: Every business needs a current account, so see what else your bank can offer.
  • Cons: Mixed chances of success and assets often are required.

British Business Bank

The government has taken some action to mitigate against the lack of lending to businesses with the creation of the British Business Bank (BBB) in 2014. The BBB runs a number of schemes through high street banks, such as the Enterprise Finance Guarantee (EFG), which encourages lending to businesses that would be turned down because of inadequate security. In 2015/16, the EFG offered some £255m of loans. Other schemes include the Enable Fund and the Angel Co Fund. Business owners should enquire about these at their existing banks, but be prepared to shop around – some lenders are more prepared to offer them than others.

  • Pros: Government guarantees enable more loans.
  • Cons: Reliant on the dedication of its providers.

Start-up Loans

Since being founded in 2012, the government backed Start Up Loans Company has lent over £250m to 40,000 businesses, and is now a part of the BBB. Long trading histories are not required, business owners just need to provide a business plan, cashflow statement and complete an online application. Once this has been sent, you’ll be put in touch with an advisor, who’ll assist with the loan. Amounts are typically between £500 and £25,000 per person, with a maximum of £100,000 per business. Loan terms are up to five years on an interest rate of 6% annually.

  • Pros: Easy access for small businesses and startups.
  • Cons: Usually smaller amounts and loans must be repaid within five years.

Grants

There are many different grant schemes available in the UK, depending on a company’s location, sector and stage of development. Business grants have been harder to come by since the abolition of regional development agencies in 2010, but businesses would still be advised to spend some time searching the internet and making enquiries at their local chamber of commerce and other networking groups.

  • Pros: Free money!
  • Cons: Criteria driven and not available to all.

Angel investment

Wealthy private investors known as “angels” have helped many of the UK’s most exciting businesses achieve success through a combination of cash and mentoring. Bill Morrow, CEO of Angel’s Den, which vets business plans on behalf of its network, says that entrepreneurs often think they need money when actually what they need more is mentoring. Angels, who tend to be experienced business people, are motivated by the prospect of helping new, innovative companies to grow. It’s not just about making money. “Angels want something that gets them out of bed in the morning. They’ve got their property portfolio, shares, bonds, cars and wine. Now, they need something to do, and they don’t want to start up their own business again,” Morrow says.

To gain funding this way, he adds, you must be able to describe, in simple terms, “what the company actually does. Over a third of business owners fail to explain what their business is all about.” It also helps, he adds, if you get on well with your investor and are easy to work with. “We never introduce someone who we think is going to be a problem.”

  • Pros: A combination of money and advice can be very powerful.
  • Cons: The wrong investor could be a nightmare – it is crucial to understand the deal.

Crowdfunding

Crowdfunding for businesses has soared over the past few years, with equity-based crowdfunding up 295% from £84m in 2014 to £332m in 2015. But it requires a lot more work than many think and is a major sales and marketing exercise. Nelson Sivalingam, founder of lifestyle subscription Wonderush, chose crowdfunding as he saw it as a chance to raise money, and wanted to create a “community” for his business. “The process involved speaking to investors offline in preparation for the campaign, pulling together our video and other pieces of the campaign to put forward a compelling message, and communicating the opportunity to our community. Crowdfunding is like a full-time job, where you need to be working every day to maintain the momentum,” he says. It’s also not a guarantee of success – recent figures suggest less than a third meet their goal.

  • Pros: The chance to access cash and raise profile simultaneously.
  • Cons: Harder work than some think and many campaigns fail.

Venture Capital

Venture capital (VC) investments are usually in the millions and investors will demand strong financial reporting and management information. Businesses therefore tend to approach VC backers later in their development, after they have built a full management team. Solar power company Oxford PV has had its growth aided by a combination of grants, angel funding and VC investment. Its first investment was a £100,000 grant from the Technology Strategy Board in 2010. In September 2016, it raised £8.7m from a combination of VCs and angels. Chief financial officer David Smyth says his early backers are still with the company and have been instrumental in bringing in new sources of money. “Keep your investors involved and updated on progress. Take them on the journey with you,” he advises. “It is important to get your message across succinctly and effectively. Be clear on what your product and your offering is, why it is unique and why it should be of interest to investors.” Entrepreneurs should note that many VCs will want to safeguard their investment and may insist that they would be paid back first if the company was to fail.

  • Pros: Serious investment for ambitious businesses.
  • Cons: VC investors will demand safeguards in case things don’t go to plan.

A bespoke combination

Jared Jesner, founder of peer-to-peer travel money platform WeSwap, sold his house to get his business off the ground, before taking investment in return for an equity stake in the business. WeSwap gained £1.2m from angel investors, followed by £4.5m from IW Capital and EC1 Capital in October 2014 and then £6.5m via Ascot Capital in July 2016. Recently, the business has launched a crowdfunding campaign on Seedrs. It’s a lot of money but the business has grown to more than 200,000 users, and Jesner says it will soon reach profitability. “It’s all about convincing smart investors that there is a great opportunity here and that we have the right team to make it happen,” he adds. “It’s a long and challenging process in which every aspect of the business is scrutinised and challenged. The key to success is perseverance. Meet investor after investor after investor, until you find one that believes in you and your vision.”

  • Pros: Flexibility to choose what’s right for your business at the time.
  • Cons: Managing multiple, occasionally complex financial arrangements, can pose issues for time-poor microbusinesses.

Alternative lenders

Entrepreneurs should always take advantage of what the market has to offer and be prepared to shop around.The market for finance is large and competitive, and there are many providers that specialise in servicing the needs of SMEs. One popular avenue of securing funding is through cash advances, which are typically flexible and can be faster than the more traditional methods of securing a loan. Leading the way in this area is Liberis, a trusted provider which has the support of the British Business Bank. Many alternative lenders are online only and so their names may not be familiar to you, even though they might be offering a worthwhile deal. However, it is important that if you do approach an alternative provider you ensure they are fully regulated and where possible seek recommendations or references. You should also pay close attention to the terms and conditions of any deal being offered and seek professional help and advice where necessary.

  • Pros: Searching the market means you will find the best deal.
  • Cons: Using a new provider is a step into the unknown.