Raising finance can be a daunting task for small business owners. Matt Adey, director and senior economist at the British Business Bank (BBB), says: “Finance is a small part of their day job of running the business; a large number would rather just stay away. They don’t really think about the options or investigate them thoroughly.”
Just 36% of smaller businesses used external finance in 2018, according to the BBB, which was set up by the government to increase the supply of credit to small businesses. That figure is down from 44% in 2012.
Half of the businesses surveyed by the BBB said they were being more cautious because the future felt uncertain. Matt says even businesses that do not trade with Europe are concerned that Brexit will prompt a wider economic slowdown.
How hard is it to raise finance?
There was also evidence, however, that the reluctance to use finance was driven more by attitudes towards banks and borrowing, than by the economic climate.
Many business owners do not apply for finance because they do not think they will get it. The BBB research showed that just under 60% believe they will be successful if they apply for bank finance. In fact, success rates are around 85%.
Busy entrepreneurs may fear that raising finance will be a long and complicated process, with terms and conditions attached to loans that might restrict the way they can run their business. In reality, that’s not always the case.
It is important to differentiate between different kinds of external finance. Matt says it is a “massive task” seeking professional investors for your business, such as the high-risk venture capital firms or business angels, who are often entrepreneurs themselves looking to invest in early stage companies. Matt says: “[That’s] really only suitable for a very small percentage of businesses.”
On the other hand, he says business owners sometimes overestimate how difficult it is to get simple debt finance products, such as an overdraft, term loan, or even a credit card to help them purchase something they need for their business.
Banks are working hard to win small business customers by making it easier to apply for loans online, and taking decisions much faster. Matt says challenger banks, such as Starling, are designing products and services with a focus on customer experience. “The large banks are trying to do that as well. It just requires more of a change from their existing ways of business, than for the new entrants who can be a bit more nimble.”
Since being awarded the £100 million grant from the Capability and Innovation fund, Starling has outlined plans to offer external finance to SMEs and support them in their growth. A report on Starling’s progress is also available. The next-generation finance provider, Growth Street, can now be accessed through Starling Marketplace. They offer access to flexible forms of credit to SMEs, helping businesses to expand.
Will I even get it?
Even those businesses that are not successful in applying for loans have plenty of other options. Small businesses that are rejected by the banks can explore other finance routes using resources such as the BBB’s finance hub, which covers a number of different options including:
- Invoice discounting – loans secured against money owed to a company by its customers, represented by its invoices
- Asset finance – loans secured against a company’s assets
- Direct lending fund - money borrowed from a fund and repaid with interest.
Then there are the marketplace, or peer-to-peer lenders, which made £2.3 billion in business loans last year. Peer-to-peer invoice financing is also growing in prominence, up by 105% last year to £1.1 billion according to the BBB.
How do I go about raising finance?
Entrepreneurs first need to consider how much they need to raise. Lenders generally feel comfortable lending 20-25% of a company’s annual revenues. It’s also important to make sure your company can afford the monthly repayments. Lenders will want to see that you have factored that in to your business forecasts.
Lenders will look at your personal credit history, particularly if you are a sole trader, or a very early stage company. As a director you could take out a personal loan for your business, which may be cheaper but makes you personally liable for the repayments.
If you think you might need to raise finance in the future, start looking at your options now. That way, you will have a wider range of funding choices open to you. As with any financial product, it is worth getting several quotes from different lenders to ensure you get the best deal.
Matt hopes more small businesses will raise finance to fund their growth. “It’s true, these are uncertain times. But if you are confident in your business – and SMEs are generally much more confident in their own business than they are in the wider economy – and you’re a bankable proposition, then there is no reason why you shouldn’t go for it.”