This article was first published in the April 2012 UK edition of Accounting and Business magazine
Q: I have a great idea for a new business opportunity I want to develop, but I’m not sure what funding options are available to small and medium-sized businesses. How can I find out what’s available and prepare myself to approach a bank to ask for lending?
The first step is to appreciate that business funding and resources come in numerous forms. So you need to think about all your options before homing in on lending.
For example, any business, whether new or established, will need initial equity finance. You may be able to provide some of this yourself with your savings or other assets.
You could also look for equity support from friends and family or previous business associates. Investigate the government’s Enterprise Finance Guarantee scheme (http://tinyurl.com/2vv3sa4), which exists to encourage bank lending to SMEs lacking the necessary security. If you are setting up a charitable or social enterprise, check whether you are eligible for specific schemes or grants. You might also research Community Development Finance Institutions (www.cdfa.org.uk), which lend money to businesses and social enterprises struggling to raise funds elsewhere.
Innovative sources of equity are worth investigating. Crowd funding, for example, links businesses directly with potential backers (try www.fundingcircle.com). Using such sites can be a good way to see if your business idea stands up to external scrutiny.
Also consider sources of non-financial support. Do any of your friends or contacts have premises, equipment or storage facilities they would offer temporarily? Free resources are as valuable as funding, especially in the early stages of a business.
Identify appropriate lending
If your business is ready to borrow, clarify what you need funds for. This will help indicate the most appropriate form of lending. If you want to manage expenses, for example, then credit cards, which may also give interest-free credit, can be a great way to manage and regulate staff spending. If your business is seasonal or occasionally needs access to short-term cash, a business overdraft may be sufficient.
Also consider cashflow finance for working capital. This releases finance tied up in unpaid invoices: within 24 hours of the business issuing an approved invoice, you could access a portion of the value of the invoice, and receive the remainder, minus borrowing costs, once your customer pays.
If your business needs funding to fulfil medium and long-term plans, a fixed-term business loan typically paid back in monthly instalments could be the solution. You could borrow against business assets to generate cash for working capital or investment. Leasing deals and commercial mortgages could be used to finance equipment.
Try to gain insights from other small business owners about the types of finance that have worked for them. If you are an SME, a local accountant will be able to tell you about the local business scene, business planning, requirements for sourcing different types of finance and what suits particular types of business. Finance brokers can also give you a view of the whole lending market.
Speaking to banks early on is also recommended. Barclays has business managers who can give you practical guidance on available and appropriate finance options. Banks and other lenders will be looking for some form of personal financial commitment from you, so you’ll need to know your boundaries and how much you are willing to offer as security.
If you like doing your own research, a huge amount of information is available online. Try www.betterbusinessfinance.co.uk for starters, or the Barclays Business website at www.barclays.co.uk/lendingkit. ACCA and Barclays also now offer online support with a new area of ACCA’s website providing advice to accountants in practice and SMEs on obtaining business finance (see below).
If you prefer face-to-face advice, the bank’s business managers can advise on finance for individual situations. Local SME support agencies also run workshops and seminars providing information and advice. Attending one of these can be a great way to learn from other SMEs too.
You might think about finding yourself an individual mentor. Services are available to link you up with someone suitable, such as the online resource www.mentorsme.co.uk set up by the British Bankers’ Association and the UK’s five largest high-street banks. Business Link also offers useful advice and tools at www.improve.businesslink.gov.uk/finance.
Create a good business plan
Your business plan is a key tool for beginning a meaningful conversation with any bank, so it’s worth developing early on and maintaining as a matter of best practice.
A good place to start is with a definition of your business. What does your business do? What products or services are provided? What channels are used to reach customers? How are your prices set?
You might find it helpful to build a pen portrait of a likely customer to clarify your target market. Then think about the resources the business will need, including premises, equipment and staff.
Being passionate about your business idea is great, but sound planning requires a hard-nosed, rational approach. You need to think unemotionally and logically about how your business might respond to different scenarios – all the way through to eventual sale or potential closure. Performing a regular SWOT analysis can help to identify strengths, weaknesses, opportunities and threats.
If your business doesn’t already have a name, try to pick something memorable, but make sure you check that no-one else is using it.
Thorough research is important, but your business plan doesn’t need to be fully formed before you arrange your first meeting with a bank or other adviser. In fact, talking to banking and other professionals early on could help refine your business plan, bringing in a fresh pair of eyes and enabling healthy challenges to your assumptions.
It is worth stressing again the importance of building a relationship with your bank’s business manager. A business manager can provide you with support right from the development of your business concept, all the way through to selling your business once it is a thriving commercial success.
Not only can the business manager help you with development plans and identifying appropriate forms of finance, but they also have extensive local knowledge. They may even be able to introduce you to local small business networking groups.
online advice on business finance
This article is just part of a new partnership between ACCA and Barclays, which is helping SMEs to grow.
Another is a jointly branded area of ACCA’s website providing advice to accountants in practice and SMEs on obtaining business finance. Written by experts from both Barclays and ACCA, the site:
* looks at the different types of finance available
* explores what to consider when choosing which one is the right option for their business
* explains how different types of loans are structured
* provides guidance on making that all-important loan application.
There are also examples of business plans and cashflows to help put together an effective loan application.