The financial crash of 2007/8 has changed the banking landscape for the foreseeable future. The banks are being told to slim down their balance sheets, lend more, increase their share price – all with the spectre of the break-up of their Retail and Investment arms, not to mention a possible new government owned ‘Business bank’.
We hear stories virtually every day about the difficulties small businesses have in seeking finance for their businesses. The Bank of England’s own figures showed that lending to UK business had declined by 3.1% in the 12 months to the end of August 2012.
The Breedon report, produced on behalf of the government in March 2012 to look at alternative funding sources for the SME, underlined the importance of Invoice Finance and the new band of ‘Alternative Finance’ businesses in supporting these ‘non-bank’ sources of finance. In fact, it went so far as to suggest that government make a £1m investment in some of the new alternative providers to assist in their growth.
Invoice Finance
Since the early Noughties, following a critical piece of case law that affected charge holders’ ability to obtain a fixed charge on book debts, the Banks have piled into Invoice Finance. Many businesses have been offered Factoring, where the entire ledger is outsourced, or Invoice Discounting, where the facilities are usually confidential, but the funding is still specifically against the book debts.
Whilst these products have developed over the past ten years, the changes have, up until recently, been very much ‘incremental’. However, largely due to the Bank’s increased involvement over this period, invoice finance has gone from being almost the lender of last resort to an accepted part of working capital finance for all sizes of business. Notwithstanding this, the remaining criticisms over recent years have been:
a. Lack of transparency
b. Long contracts
c. Expensive
d. It is your whole ledger or nothing
The good news is that the arrival of the new, so called ‘Alternative financing’ products has meant that these issues are now being addressed, both from within by the established providers, but particularly via the following ‘new kids on the block’:
Selective Invoice Finance:
These selective products are available in both the traditional Invoice Finance methodology, where cash is advanced against the security of an invoice, and also in an auction format, where individual registered buyers compete to fund the invoice at the best rate.
Interestingly there is also now an online matching service for trade finance buyers.
If you are considering Selective Invoice Finance, make sure your agreement allows for early repayment to avoid incurring unnecessary charges.
Peer to peer lending:
The most widely known of these is Funding Circle. This is what is known as a ‘Crowdfunding’ business, where individuals club together to provide loans to businesses.
This can be a very quick and cost effective way to obtain a loan, but only works for businesses with a reasonable Experian credit rating.
There are other Crowdfunding businesses specialising in equity finance, the most widely known being Crowdcube. Here investors club together and review the business plan with a view to putting money in for a stake in the company. This model has not progressed into Turnaround funding as yet.
Contractual lending:
There are a number of specialist providers of finance that will fund contractual debt. They work with specialist firms of Quantity Surveyors who are able to accurately measure the correct advance level, providing both parties with additional comfort.
It’s good practice to maximise the advice from the QS in terms of how to best raise invoices or applications for payment to the client. Their services will be included in the service fee.
Turnaround Finance
There are an increasing number of specialist Turnaround Finance providers that will potentially provide debt and/or equity to businesses facing trading difficulties. These companies are well used to buying out existing providers of finance, often within very short timeframes.
It’s best to decide upon your turnaround plan in advance of approaching these companies to make sure you stay in control and preserve value.
SUMMARY
As can be seen from the list above, there are a number of options to traditional bank finance available in the market place, many of which can be tailored to suit individual circumstances. So, if your bank says “No”, it is always worth looking at alternatives before ploughing more of your own cash into the business.
Have you had any experience with these types of alternative finance? We welcome your comments below.
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