Four sources of finance for growing SME manufacturers
Access to affordable finance continues to frustrate ambitious manufacturers, though there are signs that it is getting easier to come by, particularly as the government continues to increase the pressure on banks to support businesses.
In May 2014, the Federation of Small Business and British Chambers of Commerce helped set up a Business Banking Insight (BBI) survey to help SMEs rate the performance and services of different lenders and share their feedback on bad banking experiences.
City minister Andrea Leadsom has called the BBI a ‘wake-up call’ for banks to improve services and target better lending products that small businesses want to see.
But of course, it isn’t just bank finance that’s available to SMEs to help them grow. Let’s take a look as the funding options open to growing SME manufacturers.
Traditional bank funding
The availability of traditional bank funding is improving. However it is often necessary for most SMEs to have some form of security for the funding. Personal Guarantees are not uncommon. Security is not the be all and end all though. To obtain this type of funding, you must also demonstrate strong cash flows to convince the bank you can service the loan.
There are also government schemes that are in place to help facilitate debt funding to suitable businesses, such as the Funding for Lending scheme. It is possible that businesses can access some of this funding where there is no security or insufficient security, but not all applicants will be successful.
Invoice discounting and stock finance
Invoice discounting is readily available and can be very useful for established growing businesses because it links your sales ledger directly to your credit facility, so funding grows in direct proportion to business expansion. It is now a much more common type of lending. Unsecured overdrafts are much rarer as a result of developments in banking regulations both pre and during the recession.
Private equity and venture capital
PE and VC funders become an investor in your business. This means that they are part owners of the business, so the business owner no longer has 100% ownership. However, the aim of PE/VC funding is to significantly grow the value of the business so that when the business is sold, the owner receives more value than if they had not secured PE/VC funding.
To secure PE/VC funds a business must have very strong growth prospects and be able to convincingly demonstrate that those are achievable within a short timescale of, typically, five years. Businesses can flourish as a result of securing PE/VC funding as an added benefit can be the sector expertise and knowledge they can bring to bear as part of their commitment to their investment.
Alternative funding includes sources such as Lancashire County Council’s Rosebud Fund and the North West Fund. However, because these are ultimately government-funded programmes (local and EU) they have specific eligibility criteria.
Another source which is emerging rapidly is peer-to-peer lending, such as Funding Circle, which matches business and individuals who want to invest with businesses looking to borrow. There are also peer-to-peer funding providers, like Kickstarter, that are potential sources of start-up / early stage equity funding.
Many of these new sources of funding are seeking to replicate already established American models.
Alternative funding can be very useful, but it’s by no means straightforward, especially where public funds are involved.
Your professional adviser will be able to give you more information on the funding options available to your business.
Stephen Gregson is corporate finance director at Moore and Smalley