Planning, people and profit are important when it comes to running a successful business.
But growing a business – whether through increased sales or improved profitability – often means you need to invest more. Michael Lodge, partner at Nelsons Solicitors, who sponsor IoD Nottinghamshire & Derbyshire and Leicester, discusses the different funding options available.
What are the traditional options for funding business growth?
Many people go down the self-funded route as there is no pressure from investors. However, this option isn’t available to everyone, so this is where banks come into the picture. You can borrow as much money as the bank is prepared to lend you – this is typically determined by your ability to pay it back and how much security you’re able to put up against the loan.
When applying for a loan, the bank will ask for supporting documents such as profit and loss forecast, a business plan and cashflow analysis. It is also worth noting that substantial loans can take weeks or even months to secure. In theory, anyone with a feasible business and a clear repayment plan can borrow from banks. However, in practice, banks tend to prefer lending to existing businesses with a strong track record and established assets to act as security for a loan.
Although the main high street banks are still lending, funding for certain sectors – such as residential builders, construction and retail – have taken a more cautious and prudent approach since the credit crunch in 2008. This isn’t necessarily a bad thing, but it does make it more difficult for less established businesses to secure funding.
I’m finding it difficult to obtain funding from the bank, is there anything else I can do?
As some sectors are struggling to secure funding, particularly from traditional sources, alternative funders – non-high street banks including specialised funders, peer to peer lenders and government agencies – have stepped in to fill the gap.
Alternative funders are usually more expensive but may be more likely to lend. Another benefit is that alternative funders can often make swift credit decisions and release funds to a borrower in a matter of weeks, allowing businesses to move quickly and take advantage of potential opportunities that arise.
As businesses will still need other banking services which alternative funders cannot provide, those considering this option will still need to think about how the two will work together.
What else do I need to be aware of?
Make sure you understand all the fees that will be levied on a loan or overdraft in addition to the interest charge – these loan charges and any penalties, which may arise if any terms of the agreement are breached, can sometimes be very substantial.
If you are looking to fund business growth, obtaining specialist advice on the options available to you is essential.