Stop me if you’ve heard this one before: “A small business owner walks into a bank and asks for short term bridging loans”. Admittedly, it’s not the best opening line for a joke, but for most small businesses, access to funding, in particular unsecured funding, is no laughing matter. SMEs are often described as the lifeblood of the economy, and it’s easy to see why. In 2017, according to the UK Government’s Department of Business, Innovation and Skills (BIS), of the UK’s 5.7 million private businesses, 96% employed fewer than 10 people, while SMEs accounted for 60% of all employment and 51% of revenue (source: http://researchbriefings.files.parliament.uk/documents/SN06152/SN06152.pdf).
Yet despite their vital role in the UK economy, SMEs struggle more than just about any other type of borrower to obtain the funding they need. The banks are always telling us that they are ready, willing and able to lend, but that the demand for loans from SMEs simply isn’t there. If you’re reading this article, however, I’m fairly sure you’ll disagree. In fact, ask any entrepreneur what keeps them awake at night, and the chances are that “access to funding” will be towards the top of their list. The smaller and younger the business, the harder it is to obtain funding. The fact is, while small businesses account for almost two-thirds of all UK jobs, they still account for a tiny percentage of all bank loans.
Raising the capital to start a business, then grow it into the next big thing, is hard enough. Finding affordable funding that doesn’t cripple your business is tougher still. And doing all of this quickly, when perhaps you have an urgent need for funds, or perhaps a bridging loan for a time-sensitive, cannot-miss opportunity, while at the same time trying to keep your business afloat, is perhaps one of the biggest challenges an entrepreneur can face.
But don’t despair! There are many resources available for entrepreneurs, and the internet has definitely made it easier to connect business owners with sources of funding. Persistence, perseverance and fire in the belly are what’s required, not to mention a thick skin to handle rejection. It’s important to recognise that business funding is ultimately a numbers game: open enough chocolate bars, and eventually you’ll find that golden ticket. Here are a few tips to help get you started.
Bootstrapping: this is how most businesses start, with the owner(s) scraping together whatever personal assets they can contribute to the business. These include bank accounts, using credit cards wherever possible, and often running the business from home until it can afford its own premises. Many entrepreneurs still work in full-time jobs during the bootstrapping stage, hoping that the business can generate enough momentum before they leave employment and take the leap into full-time entrepreneurship. In the meantime, reducing costs to a bare minimum and running the business on a shoestring are the name of the game.
Friends and family: this goes hand-in-hand with bootstrapping. Depending on your age and situation, you can ask your parents and potentially grandparents, to help provide short-term financing. Ask your siblings, maybe even your children (though not little ones with piggy banks!), if they are in a position to help. And of course, talk to your friends and other contacts about financing your business. The more people you can talk to, the more perspectives you will gain on your business, which can only be positive. It’s important to document everything carefully though, and think long and hard before borrowing from family and friends; it can cause a lot of bad blood down the road if things don’t quite go to plan.
Bank loans: as we’ve seen, for all their shiny advertising, banks are generally reluctant to lend to small businesses, especially start-ups and early stage businesses which may not yet be generating any revenue, let alone profit. If your business is in this category, then this is probably not the best place for you. Even if your business is in a position to qualify for banking financing, banks are generally not the fastest way to obtain a bridging loan. It takes time to prepare and process all the documents that accompany your loan application, and then the bank has to go through a detailed credit underwriting process while they evaluate the loan, so bear that in mind too.
Peer-to-Peer loans: P2P loans have exploded onto the scene over the past decade. In the UK, companies like Zopa and Funding Circle have captured a large market share. Depending on their risk profile, borrowers are offered loans that are funded by many different individuals who invest through the platform. Applications are usually processed quickly, but interest rates can be high, so be careful and make sure your business can afford the repayments before you commit to a P2P loan, or you might regret it later on.
Crowdfunding: Another newcomer to the business funding scene, crowdfunding involves a large number of individual investors providing small amounts of funding to a project. Kickstarter is the best known crowdfunding platform, though there are many others, and they all work in different was. Check out the UK Crowdfunding Association (www.ukcfa.org.uk) for more information.
Angel Investors: There are plenty of investors out there who are generally more sophisticated and familiar with investing in young businesses. They are always looking for new opportunities to invest, and they can also add a lot to your business in terms of experience and expertise. They also know that younger businesses carry more risk, and with greater risk comes greater potential reward. In other words, angel investors will expect to be rewarded handsomely for investing in smaller, newer businesses. They will generally demand an equity stake in your business, and will usually (but not always) be more hands-on when it comes to running your business. It’s likely to be a long-term relationship (well, at least a few years), so take care before jumping into bed with the first angel who shows interest in your business. Get to know them really well, and find out what they can offer your business over and above funding, in terms of skills, experience and possibly connections. The UK Business Angels Association website (www.ukbaa.org.uk) has a wealth of information in this area.
Venture Capital: VCs and start-up incubators generally target more tech-focused businesses, so if your business is one of these, then it’s worth exploring. This is the more serious end of the funding spectrum, though, and generally involves much larger investments (from £500,000 up to £5 million or more). In addition, going down the VC route is unlikely to be fast, since these are generally professional and very experienced investors who will conduct detailed due diligence on you and your business before committing to anything. As with angel investors, they will also demand their proverbial pound of flesh, so be careful to understand exactly what they want in return before taking investment from a VC firm. Find out more at the British Private Equity and Venture Capital Association (www.bvca.co.uk).
Secured vs. Unsecured funding: having assets that can be used as collateral for a loan or other funding can be a business owner’s best friend, your ace up the sleeve. Think of it like a mortgage loan, where the lender takes a legal charge against your house until the loan is fully repaid. From the lender’s perspective, offering a loan secured by collateral can dramatically reduce the risk of making the loan. Collateral doesn’t always have to be houses and other property, though. If you have shares or bonds in an investment portfolio, or even other physical possessions such as a wine collection, watches or jewellery, they can all, in theory at least, be used as collateral. The key benefit to secured loans from a borrower’s perspective is that they not only increase your chances of obtaining funding, but providing collateral can also reduce the cost of a loan due to the lower risk to the lender. Just bear in mind that your collateral is potentially at risk if your business doesn’t go according to plan and you’re unable to keep your loan repayments.
Obtaining funding for your business can be a long and winding road, but having sufficient funding is key to survival. Be persistent, don’t leave any stone unturned, and always have professional-looking documents, accounts and presentations ready that you can give to potential investors. Think carefully about what assets you might have that can be used as collateral for a secured loan. Ask any potential lender or investor whether they are prepared to offer a secured loan, since this may be a way to greatly improve your chances of qualifying for funding, especially if you’re in a hurry. And remember: attracting smart investors can also bring a lot more to your business than funding alone. Adding their expertise and experience might make all the difference as you look to grow your business from a start-up into an established and successful company that will last well into the future.