Alternative Sources of Business Growth Finance: There Is More Than One Way to Fund Growth
Talk to any business owner or read the business section of any newspaper, and you’re likely to come across stories of struggles to access sufficient finance to grow or maintain their business. But we are beginning to witness a change in how business owners access to finance, with many now actively seeking out alternative sources.
A survey carried out by the UK’s Forum of Private Business found that 26% of businesses were hunting out alternative financial products, with 21% seeking them outside of the traditional leading High Street lenders. In fact, in another survey undertaken by the Federation of Small Businesses, it was discovered that only 35% of respondents used a traditional overdraft facility in 2011.
So, if banks are continually reluctant to lend to all but the lowest risk businesses, how can the remainder of the UK’s business population finance growth? Here are some of the increasingly popular alternative sources of finance to investigate.
Better Management of Working Capital
This may appear to be an odd source of finance, but businesses are often sitting on undiscovered cash reserves, which can be used to finance growth. A report issued by Deloitte in 2011 revealed that the UK’s largest businesses were sitting on £60 billion of unproductive working capital. Inefficiencies in handling working capital (debtors, stock, and creditors) can unnecessarily tie up your cash. Cash can be unlocked and released back into the system, allowing self-financed growth plans by taking a close look at credit procedures, how credit terms are granted and how outstanding payments are chased.
Ensuring that stock is kept at an optimum level via better inventory management is another area where cash can be released to support and finance growth. Take a good look at your inventory management process and identify areas where cash is trapped.
Good management of working capital is not just about better control of debtors and stock, and it is also about maximizing the terms given by creditors. Are you too eager to maintain a first-class relationship with your suppliers by paying well before the due date? You can positively impact your cash position by taking full advantage of the terms offered by your suppliers. Have you fully leveraged your position by seeking extensive words from, say, 30 days to 45 days?
Being more efficient in how working capital is managed can release sufficient funds to self-finance growth plans.
With traditional avenues of funding being more difficult to access, business owners are now looking to grow their resources. Such sources are an instant solution, whether drawing on cash savings, using personal credit cards or taking additional mortgages on residential properties. The Federation of Small Businesses survey found that 33% of respondents had utilized their savings to fund growth. As well as being more immediately accessible using personal resources is often a cheaper source of finance.
Family and Friends
Sometimes referred to as the three F’s – family, friends, and fools – this can appear to be a less stressful way of raising finance. In some ways, it can, but it can also be a journey fraught with danger. Tapping into their network, business owners source finance by either seeking a loan and offering to pay an interest rate higher than that on offer on a High Street savings account or offering a slice of equity in the business in return for investment.
Raising finance in this way can be relatively easy because the request and fulfillment are based on personal trust. Typically a Business Plan would be presented highlighting both the investment opportunity and the risks. Still, success is down to the depth of the relationship and level of trust.
The danger in raising funds this way is that the nature of the relationship will change from that of a personal nature to a business transaction. Failure to regularly pay as per agreed terms, or even total failure to pay, can irreparably damage the relationship so tread with care.
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