How new funding models can help small businesses beat the banks
contents Why banks won't lend to small businesses 3 An equitable solution 4 The peer-to-peer funding model 4 Funding Short term Cashflow 5 Short term loans 6 Invoice discounting 6 Business grants 6 Incubators and seed accelerators 7 Retail Bonds 7 Keep your options open 8 Finally 8 2
{ Small businesses could benefit from new funding options that could prove to be a more trustworthy replacement for the banks The banks have received a considerable amount of criticism over recent years; and most people think that it is deservedly so. The collective opinion of UK business representatives is that Banks have betrayed their position of trust by putting personal gain ahead of the needs of the UK's small businesses. According to Funding for Growth, a study conducted by Funding Circle, Small businesses in the UK would have the potential to create more than 500,000 new jobs were it not for the fact that they are stifled by poor access to finance; during the current economic crisis 30 percent of small businesses have laid off staff. Businesses have been leading the calls for change, and in response the government and the Bank of England have tried with a number of initiatives to kick start business lending. The latest of these is an 80billion 'funding for lending' scheme, offering banks access to cheap money if they lend more to businesses and households, and Vince Cable has outlined plans for a new Business Bank. Will this work? It is still to be proved. Regular waves of quantitative easing, designed to flood financial institutions with capital to encourage lending, have failed to ease the plight of small businesses. Any new initiatives will have a minimal impact until banks and businesses start trusting each other again. Firms have lost confidence that the banks care enough about them and their business, and this will not return until banks change their attitude to lending. This mistrust creates a real problem for the Government. Big companies tend to lose jobs, small growing companies create them. But without the lifeblood of cashflow, the expansion plans of small businesses are quickly snuffed out. Small business funding, however, is not a terminal case. New funding options are breathing new life into the sector and they could one day provide a longer term, more trustworthy replacement for the banks. Here we will look at how these new funding models can help small businesses beat the banks 3
The peer-to-peer funding model is gaining traction in the lending market. Funding Circle is an online marketplace where investors compete to give you the best rates. There are no middlemen, no banks and no lengthy delays. Instead, it s an open exchange with detailed real-time information, empowering you to choose the best deal for your needs. Index Venture, a leading venture capital firm that has previously invested in successful companies including Betfair, Skype, Mysql, Playfish, Lastfm and LoveFilm, backs funding Circle. Funding Circle has funded loans to date amounting to 63,633,620 and have 28,000+ investors registered to compete on each loan request. Any business can apply online in 20 minutes and you speak directly to decision makers to get a quick decision within 48 hours. The funding is transferred to your bank accounts within 2 weeks, and in as little as 3 days. Funding Circle s loans are 100% independent of your other business banking, giving you the discretion and flexibility you need to run your business effectively. And there are never any early repayment charges. If you are interested in learning more, Huddlebuy have negotiated an exclusive deal with instant cash back and a free FitBit one device for anyone taking out a Funding Circle loan. Click here to learn more. The banking crisis and subsequent economic crash has left savers wondering just where to put their cash. Meanwhile many sound businesses are crying out for cash to grow. So, a new market for funding small businesses and start-ups through equity is beginning to emerge. Crowdcube offers small businesses a new way to raise business finance by crowd sourcing. The crowd consists of individuals who are willing to invest small amounts of money in exchange for rewards and a stake in their business. The newly launched Seedrs is another equity crowd-funding platform where people can invest small amounts of money in startups. Investments can be as low as 10, and this opens it up to a very wide audience. It also means that start-ups can easily raise money from friends and family. These are high risk for investors, but with such a low barrier to entry and the ability to spread investments over a large number of small businesses and start ups many people consider it worth a punt. Certainly these 4
Get Investors to Compete to Fund your Business initiativesareattractingattractanewcrowdofinvestorswherepreviouslybusinessangelsfearedtotread. Superchargedincometaxandcapitalgainstaxbreakshavehelpedleadthecharge. TheEnterpriseInvestmentScheme(EIS)isdesignedtohelpsmallerhigherVrisktradingcompaniestoraise financebyofferingarangeoftaxreliefstoinvestorswhopurchasenewsharesinthosecompanies. TheSeedEnterpriseInvestmentScheme(SEIS)allowsnewUKbusinesses(whicharenomorethantwoyears old,havefewerthan25employeesandassetslessthan 200,000)toraiseupto 150,000.Individualinvestors caninvestupto 100,000inasingletaxyear,investinginonecompanyorspreadingtheinvestmentoverseveral companies.upto50%taxreliefisavailabletoinvestors. Thecompanywhichissuestheshareshastomeetanumberofrulesregardingthekindofcompanyitis,the amountofmoneyitcanraise,howandwhenthatmoneymustbeemployed. 5
FUNDING SHORT TERM CASHFLOW SHORT%TERM%LOANS Forsmallbusinesses,cashflowisalwaysaheadache.Withoutit,anyentrepreneurcangetintotroublevery quickly. Sometimesitisnecessarytogetshorttermcashurgently,evenifdoingsoisexpensive. ThepaydayloanproviderWongahasalreadychangedthefaceoftheUKshorttermpersonallendingmarket andnowitistryingtodothesameforbusinesslending.itwilllendnewcustomersupto 15,000andcustomers ithasalreadydealtwithupto 15,000. Notethattheinterestrateschargedarehighandthatloansmustbepersonallyunderwrittenbydirectors;a dangerousgamebutsometimesnecessary. INVOICE%DISCOUNTING ServiceslikeMarketInvoiceareanewalternativetotheopaqueworldofinvoicingdiscountingandasset financing.marketinvoiceallowsyoutosellyourlongvdatedinvoicestoinvestors.investorsbidagainsteachto provideyouwiththeirmostattractiveterms.theresultofthecompetitivenatureoftheprocessisthatinvoices tendtosellquicklyandatgoodrates.withtheadvantagethatyouareabletoaccesscashtiedupinyour invoiceswhenyourequireit. BUSINESS GRANTS Thereisagrowingnumberofgrantsandsupportforsmallerbusinesses.BusinessLinkisagoodplacetostart lookingandyouwillfindsomeexcellentadviceonraisingmoneythere. Someoftheinitiativescurrently availableinclude: EuropeanRegionalDevelopmentFund(ERDF) thissupportsawiderangeofeconomicdevelopment programmes.thefocusisonsustainabledevelopment,productionandconsumptionandstimulating enterpriseandsupportingsuccessfulbusinesses EuropeanSocialFundVthissupportsemploymentofthemostdisadvantagedinsociety. JEREMIEVentureCapitalFunds providesdebtandequityfinancingforsmesincertainpartsofthe northofengland. RuralDevelopmentProgrammeforEnglandprovidesgrantsforbusinessesinvolvedinagricultureand forestry RegionalGrowthFund supportsthecreationofnewjobsintheprivatesector EnterpriseZones isadditionalinvestmentthatisavailableforbusinessesinspecificdeprivedregions 6
AgreatplacetosearchforEuropeanandUKGovernmentgrantsisatJ4Bgrants.co.uk.Thereisalsoagreatdeal ofadviceonhowtostructureasuccessfulgrantapplication. TheTechnologyStrategyBoardisallaboutinnovationisanditsaimistoencourageeconomicgrowthby supportingbusinessvledinnovation.ithelpsbringpotentialpartnersandnetworkstogetherwiththeaimof convertinggreatideasintoproductsandservices. INCUBATORS AND SEED ACCELERATORS IfyouareahighpotentialstartVuporanearlystagebusiness,anewbreedofincubatorsandseedaccelerators haveemerged.theirmodelsvary,butgenerallytheyhaveonethingincommon:offeringexpertiseandfundsto pushyourbusinessforwardtothenextstageinexchangeforequityandashareofyourupside. Someexamplesofthesearelistedbelow,butmanymoreprogrammesarecroppingupallaroundthecountry. Wayra%Academy%isaninternationalorganizationsthatprovidessupportfordigitalstartVups InnovationWarehouseprovidesdeskspace,advice,mentorshipandinvestmentforwouldVbe entrepreneurs. Seedcamp%isEurope'sleadingmicroVseedinvestmentfundandmentoringprogram HackFwdisapreVseedinvestmentcompanydesignedtoenabletallentedpeopletolaunchtheirideas RETAIL BONDS Oneanswercouldlieinretailbonds,whichprovideawayforbusinesstoraisefundsthroughretailinvestors, andrecentlytheukhasseenthelaunchofseveralofthese. Unliketraditionalbonds,retailbondsspecificallytargetretailratherthaninstitutionalinvestorsandtheyaresold directlythroughadistributornetworkofbrokers,privatebanksandwealthmanagers.typicallytheyhavelow denominationssothatinvestorscaninvestjustthousandsofpoundsratherthan 50,000to 100,000whichis typicalintheinstitutionalmarket. Fundingispossibleforcompanieswithoutthescalenormallyassociatedwithpublicbonds.Thismaybe importantforcompanieswherebankfundinglinesareeitherunattractiveorunavailable. Sofar,theyhavebeenconfinedtolargercompanies,forinstanceNationalGrid,SevernTrentandTescoBank. Howeveritcannotbelongbeforeportfoliosofloanstosmallerbusinessesarepackagedupinthesameway; thiscouldbearealgamechanger. 7
KEEP YOUR OPTIONS OPEN Despiteourearliercommentsaboutbanksandbanklending,itisstillpossiblefortherightsortofbusinesswith therightsortofbusinessplantogetabankloan. LoanFinderisakindofcomparisonwebsitethatallowsyoutolocatebusinessloans,thoughyoumightbe horrifiedbysomeoftheinterestratesthatarechargedonthembycertainlenders. FundingOptionsisanewservicethataimstomakeaccesstomultiplefinancingoptionseasierbygettingthe informationandapplicationrightfromthestart. FINALLY. Ifthebankscan'thelpyoufinanceyourbusiness,itisclearthatmanyalternativeswaysofobtainingfinanceare becomingavailable.perhapsthesewillultimatelyreplacetheoldfashionedandstraightjacketedmodelof traditionbankloansforsmallbusinessesandstartvups. Whatisclearisthat,whateverpositionorstageyourbusinessisin,thereishelpavailable. 7