34 funding your business The brave new world of new finance


The Bank of England’s 'Trends in Lending' report October 2014, has identified that lending to UK businesses is in a state of stagnation, writes Kevin Walmsley, managing partner, Heathrow office, Wilkins Kennedy


The report identifies that the net flow of lending to UK businesses by all UK resident banks and building societies over the six months to October 2014 was, on average, zero.


The report continued that ”contacts of the Bank’s network of agents had continued to report that many SMEs preferred to repay debt”.


However, there is a bigger picture emerging in terms of sources of finance. The Government has been working hard to facilitate the creation of greater funding diversity and availability to small and medium-sized businesses. The new British Business Bank, launched in November 2014, already appears to be hitting the ground running, with £829 million of new lending to smaller business having been supported, with a commitment to unlock a further £10 billion over the next five years.


So where is the diversity and availability in funding coming from?


Whilst no means exhaustive, there is a growing list of potential resources.


Equity funding from business angels or venture capitalists, according to research specialist BDRC Continental, is only used by 1% of SMEs. Greater accessibility is now being addressed by Government, especially in the sub-£2m level which is generally recognised as a difficult band.


According to the Asset Based Finance Association (ABFA), asset-based finance is growing healthily. ABFA claim that 80% of asset-based finance is invoice finance (lending against the value of invoices issued), with the remaining 20% accounted for by asset-based lending (where money is lent secured by assets owned by the business, including inventory, property and machinery, as well as more intangible assets, such as brands). ABFA reported in December 2014 that the combined amount of invoice finance and asset-based lending provided to


businesses in the UK had increased by 12% in the past year.


Crowdfunding has also been receiving growing attention in recent times. It is raising money directly from a large number of people all putting in what can be relatively small amounts of money. A business or idea is showcased on a crowdfunding website, with potentially millions of ‘Dragons’ available to back the idea or venture with their own cash. The sums raised are not necessarily always small either. Film maker Spike Lee is reported to have raised $1.25m through the crowdfunding website Kickstarter to make a new film.


Traditional lending itself has been receiving an overhaul. Whilst the traditional high street banks may have contracted in the lending market, so the space has been occupied by new players. New ‘challenger banks’ have come to the fore, both as a high street presence and as niche business lending


Finding the right type of funding


Cashflow and funding is the lifeblood of a business. Without the right type of funding at the right time, businesses shrivel and die. So, what funding options are there to secure the cash you need? Emma Ladd, associate in the corporate and commercial team at Gardner Leader solicitors, considers two options


Debt funding


Debt funding is about borrowing money which you pay back (normally with interest) and there are many types. They range from the complicated arrangements within institutional funders to borrowing a few thousand pounds from friends and family.


The set-up of a business or the purchase of a new asset normally involves term funding, which is money lent for a particular period, with repayment either during or at the end of the term.


Businesses that need funding for cashflow often turn to invoice financing. This is useful where a business has a large amount of debt each month from its customers. Essentially, the funder pays a percentage of the amount of each invoice and receives the entirety of the money when the invoice is paid.


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With all debt funding, the documentation is key. Institutional lenders will often produce rafts of standard documents, which often require a large drink and a darkened room to navigate. However, even small-scale lending from friends and family should be properly documented to ensure that both parties are protected.


Debt funding often also requires security to back it up such as a personal guarantee or a full debenture granting charges over all the assets of a company.


Equity funding


Equity funding differs from debt in that, in the event of the business failing, the funder does not get their money back. This makes equity funding more risky and therefore investors (especially institutional investors) tend to look for higher returns.


For companies, equity funding tends to be through the purchase of shares. For businesses which are not incorporated, the funding is generally a capital injection. The funder then normally becomes a partner in the business (silent or otherwise).


With equity funding it is worth noting that equity funders often want a say in the running of the business. Equity investment needs to be considered very carefully and the documentation carefully drafted to ensure that the business has the flexibility it needs to operate while protecting the investor. The investor’s exit will also need to be considered and planned.


Funding is essential to many businesses, large and small. However, it can be tricky for the unwary so seek the right advice


THE BUSINESS MAGAZINE – THAMES VALLEY – FEBRUARY 2015


before deciding on what's best for you and the business.


Details:


01635-508080 www.gardner-leader.co.uk


specialists. In addition, investment managers have successfully entered the lending market, particularly in the area of longer-term lending to medium-sized businesses.


With so much choice available it is important, not only to do one’s own homework, but also to get solid independent advice and as never before to construct very well built business plans.


The prospects for growth this year are looking positive and the funding arena looks much brighter than in recent times.


When it comes to money, even in 2015 two old adages remain as true as ever “look after the pennies and the pounds will look after themselves” and “cash is king”. From everyone at Wilkins Kennedy, we wish you a prosperous and exciting 2015.


Details: Kevin Walmsley 01784-435561 kevin.walmsley@wilkinskennedy.com www.wilkinkskennedy.com


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