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Bank alternatives: Ways to fund business growth

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In January to June 2015 SMEs received more than 1.1bn in net lending according to the Bank of England the first six-month period that banks have lent more cash than received in repayments since records began in January 2014. Despite this, the Federation of Small Businesses said access to finance remained challenging, and feedback from our clients has supported this view.

Through our own experience in seeking investment to start Harbour Key in the middle of the economic downturn, we have become specialists in seeking alternative finance.

First, be clear about exactly why you need the money, how much you need and how it will improve profitability and cash flow. Without suitably costed answers you will not get very far. You should also consider whether you actually need external finance. An established business may be able to fund itself by improving cash flow through a review of prices, costs, sales, stock levels, debtors etc.

There are two broad categories of funding. Borrowing means the business will have to service the debt and you as the owner may have to provide personal guarantees, whereas capital investment involves giving up some part of ownership to the investor.

Sources of borrowing

Most of the main banks offer the Enterprise Finance Guarantee (EFG) loan a government backed scheme to facilitate lending to viable businesses turned down for a normal commercial loan due to lack of security or a proven trading record. Although welcome, in our experience businesses have had difficulties in getting banks to agree to EFG loans.

The Start Up Loan Company, another government-backed scheme, is funding loans of up to 25,000 as the name suggests, to startups, which include mentoring and advice. The average granted is around 6,000.

Another rapidly growing option is peer to peer lending, where your company “advertises” its business and loan proposition on a web-based platform to potential lenders, who indicate their interest and the amount they are prepared to lend.

If you need to buy machinery or equipment, consider leasing assets/hire purchase. Some companies offer arrangements through organisations such as the Federation of Small Businesses, while others offer favourable terms for startups.

Read more about alternative finance:

Another route is debt factoring or invoicing discounting, which is based on the principle of selling your businesss invoices to a third party which is then charged with processing the invoices. Your business can receive loans based on the expected invoice payments.

Company pension schemes are not generally permitted to make loans to their sponsoring employer. One exception is the Small Self-Administered Scheme (SSAS), provided certain conditions are met. However, borrowing from your pension means your fund is at risk.

Lenders of last resort can be considered for small loans. These are typically charities or regional/local council initiatives and can lend up to around 20,000. Interest is charged on the unsecured loan, generally slightly higher than a high street lender. Short-term lenders such as Wonga offer businesses short-term emergency loans to solve cash flow problems, but it is important to consider the interest rates and affordability.

Capital investment options

Capital investment requires the business owner to give up part of their ownership. This may result in third parties being involved in running the business, which could be advantageous where the investor brings valuable skills, experience and contacts as well as cash.

The main sources are:

  • Friends and family;
  • Web-based crowd source funding, which can be equity based (shares) or reward based (e.g. percentage of future returns). Similar to peer to peer lending, it involves pitching the business on a web platform to attract investors;
  • Accelerators, which are government or privately backed programmes for young, high growth businesses. It generally offers support such as mentoring, office space and training as well as funding; and
  • Business angels usually individuals who have made money through other business ventures and may provide time and experience as well as money. They may invest on their own or as part of an angel network. Funding is typically in the 100,000 to 500,000 range. For larger investments, a venture capital company can be considered.

Investors making capital investments to limited companies receive tax advantages under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). Each scheme has qualifying conditions, including the amount that can be invested and the type of trade the company conducts.


Grants normally relate to specific industry sectors or a region earmarked for development or regeneration. For example, the government-funded Technology Strategy Board provides grants to bring new products and services to market. Your local council also may offer small grants for improving your shop front or assisting with training.

Raising external finance can be crucial when growing a business. It is important to consider all the options, how to apply to maximise your chances of success, and whether you meet the funding criteria.

Phil Mitchell is director at Harbour Key.



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