Have you considered any of the alternative sources of finance? - Veterinary Practice
Your browser is out-of-date!

Update your browser to view this website correctly. Update my browser now

×

InFocus

Have you considered any of the alternative sources of finance?

Adam Bernstein discusses some of the wide range of alternatives to banks for practices which need money for setting up or expansion – or other purposes – and the advantages and drawbacks…

BOB Hope, the late Hollywood
actor and comedian, summed up
quite accurately what most believe
about bank lending practices: “A
bank is a place that will lend you
money if you can prove that you
don’t need it.”

While that may not be true in every
instance, since the start of the 2008
financial crisis it certainly has been
much harder to gain bank
funding; it’s
also the
reason why
the
government
has used
devices such
as quantitative easing and Funding for
Lending to get cheap money out to the
banks to, in turn, pass on as loans.

Indeed, despite encouraging signs
of economic recovery, the BDRC
Finance Monitor for SME Lending
released at the end of August indicates
that the banks seem to be putting a
brake on growth rather than providing
the necessary funds to support it.

The report shows the most
positive business sentiment since its
inception, with 51% of SMEs looking
to grow their businesses in the next 12
months. But also shown is a 5%
increase in the number of firms
looking at external finance, including
turning to friends and family as well as
having to inject personal funds into
their business.

The proportion of businesses
using traditional banking services
remains low with only a third of SMEs
using loans, overdrafts, commercial
mortgages and credit cards.

Naturally, there are shelves of
books on the subject of finance and
the following are only some of the options open to businesses needing
finance.

Friends and family

Often ignored, borrowers should
consider starting with friends and
family. As a resource it can be
unrivalled in that lenders often don’t
want security, charge low or no interest
and often require less detail in the form of a business plan.
The process is not pain-free, however, and to succeed must be
totally open; lenders must be told of
the risks; shouldn’t lend more than
they can afford to lose; and ideally, the
arrangement should be documented
properly.

There’s a good guide to borrowing
successfully at www.smallbusiness.co.uk/starting-a-
business/start-up-
funding/23312/borrowing-from-
family-and-friends.thtml.

Peer to peer lending

A relatively new entrant to the area of
lending is peer-to-peer (P2P) lending.

The principle is quite simple and
revolves around a business placing a
borrowing proposal online with
various lending platforms for members
to subscribe to, missing out the
traditional methods of raising finance.

Effectively, members lend en masse
to a borrower rather than one
institution advancing the funds.

For borrowers it’s an alternative
source of finance but for lenders it
can offer – albeit on an unprotected
risk basis – a return of 8% to 15% on
their money. And it’s growing, much to the chagrin of the banks: NESTA, an
innovation charity, reckons that the US
and UK saw P2P lending of $2.7
billion in 2012.

While most loans are personal and
unsecured, there is movement to make
this form of finance more mainstream
for businesses.

Rebuildingsociety.com reckons that
24% (1.2 million) of small firms will
struggle to gain finance over the next
year and 16% would consider applying
for a P2P loan.

Loans granted vary in size from
£2,000 to £250,000 and can be taken
over six to 60 months. As for costs, on
top of the interest charged is normally
an arrangement fee.

Each of the lenders will have its
own requirements as to who they will
lend to, based on credit history and
business structure. P2P loans generally
need two years of trading history.

The website www.p2pmoney.co.uk
offers more background on the
principles and risks involved for both sides of the transaction. It also offers a
number of tools including an interest
rate calculator and a table that details
the services each firm in the market
offers.

Asset-based lending

As the name suggests, this is a form
of loan that is secured on an asset
belonging to the business. But just as
with a mortgage on a home or
commercial premises, if the loan isn’t
repaid then the asset is taken and sold
to recover the debt.

This type of lending tends to be
used when the normal routes for
lending – secured or unsecured – are
unavailable and the need for finance
is more urgent, say to bridge cashflow
or to fund working capital.
Consequently, the interest rates
charged are often higher while the
loan is secured on property,
machinery, equipment, the sales
ledger (more on this below) or
inventory.

It’s nevertheless quite popular and
the Asset Based Finance Association
(ABFA) reckoned that some 43,000
firms used it in the last quarter of
2012 to the tune of £17 billion.

ABFA has a finder tool for
borrowers to use at
www.abfa.org.uk/public/industr…
rmation.asp.

Business angels

Anyone with a
passing interest in
the BBC’s Dragons’
Den will have seen
countless
entrepreneurs
pitching ideas to the
five wealthy
investors. What
viewers are
witnessing are
business angels at
work, albeit in a
highly edited and pressured TV
environment. The idea is simple
enough: wealthy investors give money
and possibly time in exchange for
equity – a share – of the business.

Statistically speaking, the majority
of the UK’s 18,000 angels are men
aged 45 to 65 who have made their
money elsewhere. Most work in a
syndicate since more than half – 56 %
– of investments lose money,
according to the UK Business Angels
Association; the syndicated method of
investment allows angels to spread
their risk.

The typical investment they make
is between £10,000 and £750,000 but
is on average £42,000. Business angels
tend to look for early stage or high
growth businesses and their total
investment a year is, says the UK Business Angels
Association,
£850 million – a
sum that makes
them a worthy
target for any
borrower.

Firms
needing this form of
investment can
find help and
tools at
www.ukbusinessangelsassociation.org.uk.

Government grants, loans
and other support

One huge resource that many take
little account of is the government’s
business finance and support finder
that can be found at
www.gov.uk/business-finance-
support-finder.

This is a very simple, yet effective,
filtering tool that allows users to drill
down to the appropriate programmes
for a given industry sector, stage in the commercial cycle, business structure,
type of assistance
and, of course,
location.

As an aside, the
government clearly
sees these
programmes as
useful, politically at
least, as it announced
in September an
extension of two of
them: the New
Enterprise Allowance
and Start-up Loans.

But as an
example, a private
company in
agriculture, based in
the West Midlands, in a
“grow and sustain” phase of
business, that wants either finance,
equity, grant or loan assistance, can
tap into one of 70 programmes.

Included in the list are the
Enterprise Finance Guarantee (that
offers between £1,000 and £1 million
in finance guarantees to firms with a
turnover of less than £41 million); an
Apprenticeship Grant for Employers
(that offers £1,500 to firms that take
on an apprentice aged between 16-24
years); the Young Person Wage
Incentive (that offers employers with
fewer than 50 staff £2,275 for each
18-24 year unemployed person given
a job lasting at least 26 weeks); and
Business Loans – Coventry and
Warwickshire (loans to £50,000 for
businesses employing under 250
people).

Success, of course, requires time
investment to not only search for the
most appropriate programme but to also complete the application process.

What lenders want to see

No lender – bank, P2P, angel or
grant/loan giving organisation – is
going to hand over monies unless a
good case is made for it. Borrowers
need to compile a good business plan
that, excuse the pun, lends credibility
to the project.

The information required will
depend on the amount sought, the
purpose of the loan and the target
audience. However, it should include
an executive summary that outlines
the salient points of the proposal and
details on the key individuals within
the borrowing firm, including their
particular skills and experience.

It’s also necessary to offer up
details of market research that notes
any competition and how the
business will (further) exploit the
market. At the same time, a lender
will want to see a marketing plan that
indicates how sales will be grown (to
help repay the borrowing).

Past financial performance will need to be detailed and will need to
cover the last three
years of accounts, if
available, and ideally
audited. But as past
performance never
guarantees future
returns, lenders will
want to see financial
projections for the
next few (three to
five) years and
cashflow forecasts
with detail on how
creditors, debtors,
expenditure and stock
will be managed.
Allied to this,
borrowers should
collate plans for what would happen if plans aren’t met.
Lastly, and most importantly, a borrower will want to know how
their investment will be repaid
and/or how any acquired
shareholding will grow.

Other sources of help

  • The ICAEW has a Business Advice
    Service at http://find.icaew.com/
    pages/bas, offering a free advice
    session with a chartered accountant.
    See www.businessadviceservice.com
    to find the nearest office participating
    in the scheme.
  • Mentorsme – mentorsme.co.uk –
    offers a list of business mentoring
    organisations across Britain to firms
    that need a guiding hand.
  • A privately run site, RBA, at
    www.rba.co.uk/sources/sme.htm, has
    a long list of bodies and
    organisations that can help a business
    with advice.

Have you heard about our
IVP Membership?

A wide range of veterinary CPD and resources by leading veterinary professionals.

Stress-free CPD tracking and certification, you’ll wonder how you coped without it.

Discover more