Member Article

Funding growth - what are the options?

It’s no secret that more firms go under when the economy is emerging from a recession than going into one. And it’s tragic to think that businesses which have withstood the adverse conditions we have seen in the past six years could now be at more risk than ever.

First, ask yourself: “If turnover increases say by 10%, 20%, 33%, how will we cope with the various levels of growth?”

It’s safe to say that without adequate working capital, your business is at risk of overtrading and liquidity problems.

Basic financial modelling of balance sheet, sales, profit and cash-flow forecasts can tell you what you need to finance the extra business coming through your door. The next step is to consider the funding options and whether the traditional forms of finance, such as an overdraft from your bank, are right for you, or even available these days.

The last few years has seen the emergence of many new funding products and specialist funders. These are offering viable alternatives, or even replacing, the ‘traditional’ funding channels from conventional financial institutions.

An effective source for funding working capital can be sales ledger finance such as invoice discounting. This is a mechanism for short term borrowing which enables you to draw money against your sales invoices before the customer has paid. You effectively borrow a percentage of the value of your sales ledger using unpaid invoices as collateral. Depending on the nature of your business this can unlock significantly more finance than an overdraft.

Sales ledger finance worked for Solution EU Ltd, a client of ours which markets merchandised products in the baby goods market. We helped our client to transfer its overdraft to an invoice discounting facility combined with trade finance. The business has doubled its turnover every year for five years and has maintained its funding position.

Mark McLoughlin, Director and Co-Owner of Solution EU, says: “This solution has worked well for us. A traditional overdraft facility wasn’t flexible enough to meet the funding requirement of a rapidly growing international business.”

Business angels, private equity investors and venture capitalists all offer sources of funding. Depending on your pitch and size of business, they offer finance usually in return for a stake in the company.

If you don’t want to part with equity, or an angel investor hasn’t come your way, then consider a loan with one of the new peer-to-peer funding sites which are emerging as alternatives to traditional funding sources. Zopa, Funding Circle and RateSetter are the main players right now and there are more coming up. Each is set up slightly differently but basically businesses apply for loans on the site and investors compete to lend the money in the style of an online auction.

The process is simple, speedy and transparent and can be used for a range of purposes including working capital, expansion capital and one-off projects. Read the small print, though, and take note that these sites are not currently regulated by the FCA, although requirements for businesses to meet a series of protection standards are being introduced in April.

Finding the right finance depends on your business, your vision and your resources. It can be a maze, so take professional advice to fully understand the options and potential pitfalls.

Peter O’Connell can be contacted on 01865 292245, or email peter.oconnell@shawgibbs.com.

This was posted in Bdaily's Members' News section by Shaw Gibbs .