The small business finance challenge by Simon Carter, Director of Touch Financial on 07-Sep-2012

Small businesses continue to complain that they can’t obtain the finance they need from their banks and their concerns are justified. There is much being made of the lengths some small businesses are having to go to in order to secure further funding - including borrowing off friends or running up debts on credit cards and that isn’t the way forward. So SMEs are increasingly looking at other sources of lending.

It is inevitable, at least in the short-term, that other sources, such as independently-funded lenders, will look to capitalise on the gap created by the main lenders reluctance to advance funds. Whilst the Asset Based Lending / Invoice Finance marketplace is a microcosm of the overall banking sector, more could certainly be done by lenders to push these products over the less secure overdrafts. All the time they aren’t doing this, privately-funded lenders will innovate and move into this space.

This form of lending could be very good for SMEs in the short- to medium-term. However, there are issues with a lack of regulation, which in this sector could encourage rogue lenders to take a stake and create even larger long-term issues.

My advice to owner / managers that are having problems getting the loans they need is simple: don't panic - look outside the normal funding solutions. While there are loans available for businesses that can demonstrate a healthy set of accounts, we have seen that businesses are still struggling to raise finances that way. There are alternatives, such as invoice financing, but banks and accountants still treat this as a secondary form of lending when in reality it is very much taking a front seat as a working capital solution. It’s no wonder banks are reluctant to lend in traditional ways, as pressure from the public to lend responsibly is pushing against the same public pressure for banks to lend more to businesses and consumers alike. In the commercial sector invoice financing represents a more secure way for banks to provide a working capital solution and also meets the requirement to generate the extra cash.

The reality is, unless small business have a high-level of security to offer, then banks don’t want to know. So you will need to demonstrate what the financial requirement is before you approach a lender. Is it long- or short-term? Is it funding for growth or funding to maintain the trading position?

Businesses should consider providing personally-backed security upfront. They should aim to get the lender hooked on them, the business and what they have by way of collateral to back the facility.

Don’t overpromise when it comes to turnover – ensure that the business is hitting or exceeding this and make sure it has a realistic business plan in place that shows signs of growth.

In short, get them interested and THEN negotiate the best deal for the business. All too often facilities are declined upfront as limited or the wrong information is provided at the early stages of the negotiation. Business owners don’t appreciate that, in a sellers market, the buyer needs to sell.

Unfortunately, the future of financing for new SMEs is going to be tough. New starts have the hardest time. With the banks’ current unwillingness to lend to established businesses, it’s no surprise that they are even more reluctant when it comes to new starts that have no track record. An increased amount of security will be required alongside a detailed business plan. If you cannot provide these things then you could face major issues when trying to raise capital via the banks.

For certain types of start-up businesses Factoring can be an extremely effective way of enabling a business to grow. With factoring, the facility will grow in line with sales, which can lead to a virtuous circle of growth.

For more information about business finance options, please visit: www.touchfinancial.co.uk

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