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Scaling up when you don’t have the cash injection on your side

All businesses have costs, and sometimes getting a scale-up off the ground requires a cash injection. Not everyone is lucky enough to have the bank manager on their side though – so where else can you turn?
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All businesses have costs, and sometimes getting a scale-up off the ground requires a cash injection. Not everyone is lucky enough to have the bank manager on their side though – so where else can you turn?

The funding landscape for small businesses has been a real mixed bag in recent years. Many SMEs took a hit during the financial crisis as high-street bank lending dipped, but in October 2015 the Bank of England announced that lending to this sector had grown for the first time since the recession.

Despite this, getting hold of finance can be a real sticking point for many startups and scale-ups.

According to a report by Close Brothers, only 36 per cent of SMEs have used bank loans to grow the business, and 26 per cent have used overdrafts.

Adrian Sainsbury, CEO Close Brothers Commercial Division, said: “Some SMEs still see overdrafts as a positive option for increasing liquidity but in fact it’s not a great way to borrow money.

“In many cases an overdraft will not provide enough cash to fund the much-needed new vans, computers or machine tools, and at any time the ban can withdraw the facility leaving little or no time to repay the money.”

So, if you can’t rely on your bank for a cash injection, what finance options are there?

The rise and rise of alternative finance

If you are concerned about accessing finance for your business, you shouldn’t feel alone – although 90 per cent of all SMEs are confident they can find access to finance, size plays a huge role. The smaller the turnover, the smaller the confidence.

According to Close Brothers, the tipping point at which SME confidence about finance really takes hold, rising above the 90 per cent mark, is when revenues go above £5m.

Many small businesses only approach the biggest banks for finance, and the rejection rate for first time borrowers is around 50 per cent. Over a third of these reportedly gave up after the first rejection, oblivious to other methods of financing their business.

The market is there for alternative finance methods, small businesses just have to be encouraged to plan around these emerging opportunities in order to scale up.

“When starting a business, a great deal of time and energy is spent on planning and developing strategies to establish and maintain a place in the market,” said Sainsbury.

“However once up and running, it’s very easy to focus on ‘business as usual’ and this can often adversely impact on opportunities to expand and grow the business. Longer term planning is essential to maximise potential future success.”

Need a cash injection? Know your options

A study by Nesta, Cambridge University and KPMG reported that the alternative finance sector represented £3.2bn worth of investments and donations in 2015, but the total lending to all non-financial businesses in the same time period totalled over £205bn – which gives some indication of how much traditional bank loans are still dominating the market.

Yet there are so many options to get your hands on a cash injection, including:

• Crowdfunding – it does what it says on the tin. This is where a business asks for investment from a crowd of people on an online platform
• Invoice funding – if you have unpaid invoices, you can use them to prove you will have money in the future and get a lender to loan against them. This is good for short-term finance
• Angel investors – much like with Dragons’ Den, an angel investor will typically stump up some cash in return for a share of your business
• Asset finance – If you have assets, such as buildings, inventory or equipment, you can borrow against
• Challenger banks – challenger banks are banks that offer better deals or services for small businesses than the main high street banks
• Pension-led funding – this allows you to tap-in to your pension to fund your business. This is a high-risk option, and preferably used for scaling up successful businesses than getting startups to launch.

The difficult part is working out which alternative method works best for you. This can depend on a number of factors. For example, how well established is the business? Are you prepared to give up equity? How secure is the future of the business? How much do you need, and what sort of projects are you trying to finance?

If you are looking for finance to keep you cash flow ticking over, or to cover late payments, your best option might be something like invoice finance.

However, if you are looking to scale up your business and expand, taking on large projects like opening overseas or recruiting a whole new batch of staff, you may want to consider giving up some equity in the hopes of attracting an angel investor.

As with anything, the key is to do your research – any financing option you decide upon needs to be tailored to your business and your specific requirements.

Never rush into any agreement just to get your hands on some that all-important cash injection, but don’t put all your eggs in one basket either – there are more options out there than just traditional bank loans.

This article is part of a wider campaign called the Scale-up Hub, a section of Real Business that provides essential advice and inspiration on taking your business to the next level. It’s produced in association with webexpenses and webonboarding, a fast-growing global organisation that provides cloud-based software services that automate expenses management and streamline the employee onboarding process.

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About Author

Letitia Booty

Letitia Booty is a special projects journalist for Real Business. She has a BA in english literature from the University of East Anglia, and since graduating she has written for a variety of trade titles. Most recently, she was a reporter at SME magazine.

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