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. However, we are beginning to witness a change in how business owners access finance, with many now actively seeking alternative sources.

A UK’s Forum of Private Business survey found that 26% of businesses were hunting out alternative financial products, with 21% seeking them outside 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.

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Better Management of Working Capital

This may appear to be an odd source of finance, but businesses often sit on undiscovered cash reserves, which can be used to finance growth. A report by Deloitte in 2011 revealed that the UK’s largest companies 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 looking closely 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. 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 but 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 30 days to 45 days?

Being more efficient in managing working capital can release sufficient funds to self-finance growth plans.

Personal Resources

With traditional funding avenues more difficult to access, business owners want 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 finances. 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 this way can be relatively easy because the request and fulfillment are based on personal trust. Typically, a Business Plan would be presented highlighting the investment opportunity and the risks. Still, success is down to the depth of the relationship and the 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.