In this article we explore the various methods of finance that exist within the UK market for Business to expand and grow. The UK has a well-established security structure and legal framework that is very supportive of Business to raise finance. That said, over the years there has been a marked increase in so called “Asset Based” lenders following in the footsteps of the US market.
The market is no longer dominated by the main clearing banks such as Barclays, HSBC, Lloyds, and Nat West. Secondary and Alternative lenders have gained a major foothold in the market which has made raising funding a lot easier yet can make the available options confusing. We see more and more Business these days approaching a Broker who has access to whole of market to help them decide on the best financing solutions for them. We have established links through Ian Taylor – biz4Biz Associate if you need an introduction.
There are several common finance methods for businesses in the UK. Here are some of the most popular ones based on an established legal system and methods of providing collateral for a borrowing:
- Bank Loans: Traditional bank loans are a common method of financing for businesses with repayment from 1 year to 25 years depending on the life of the asset. The key is the life of the asset where long-term assets should be matched by long term borrowing. These loans typically require collateral in the form of property or chattels (Plant and Machinery) and have fixed repayment terms, including interest rates if required. As there is a longer-term risk, the Interest rates tend to be marginally higher than for, say, an Overdraft Limit.
- Asset Financing: As in point 1 above, Asset financing involves using assets, such as machinery, equipment, or vehicles, as collateral to secure a loan or lease. This method allows businesses to access funds while still using the assets for their operations. This affords the business the opportunity to own the asset at the end of the loan or just to lease it for ongoing operations. There are many specialist asset finance lenders in the market that solely assess the asset for its security.
- Business Overdrafts: Overdraft facilities provided by banks allow businesses to withdraw more money than they have in their accounts, up to a certain limit and, against short term assets such as book debts. That is not always the case, and a Bank can provide a business with “In case of need” Overdraft facility and this will be based on the profitability and shareholder value (Net Tangible Assets). Interest is charged on the amount overdrawn and accrued daily. As it is a short-term risk, the interest rates generally are lower. Equally an Overdraft Limit should not normally be more than 15% of annual turnover.
- Invoice Financing: Also known as invoice factoring or invoice discounting, this method involves selling unpaid customer invoices to a finance company. The finance company provides a percentage of the invoice amount upfront, normally 85%, and collects the full payment from the customer later, minus a fee. However, the most common form of Invoice Discounting is called “Confidential Invoice Discounting”. This is the most favoured as the business retains control of the client communication and relationship and simply achieves funding against the entire Debtor book at a given time. Again, this is usually 85% prepayment and fees/interest are debited monthly. To evidence control, the Lender will stipulate a designated account for the Invoice proceeds to be paid into. Systems involved today are very digitally driven and there are many lenders in the market to choose from.
- Equity Financing: Equity financing involves selling a portion of the business to investors in exchange for capital. This can be done through private equity firms, venture capitalists, or by issuing shares through an initial public offering (IPO) on a stock exchange.
- Crowdfunding: Crowdfunding platforms allow businesses to raise funds from many individuals, typically through online campaigns. It can be reward-based (contributors receive a non-financial reward) or equity-based (contributors receive shares in the business).
- Government Grants and Loans: The UK government offers various grants and loans to support businesses, particularly in specific sectors or for startups and innovation. These funds can be accessed through government programs and initiatives. Depending on the type of grant, there could be a liability to pay Corporation Tax later.
- Angel Investors: Angel investors are high-net-worth individuals who provide capital to early-stage businesses in exchange for equity. They often bring industry expertise and mentorship along with their investment. https://biz4biz.org/business-angels/
- Peer-to-Peer Lending: Peer-to-peer lending platforms connect businesses directly with individual lenders who are willing to provide loans. The process is typically facilitated through an online platform, bypassing traditional banks.
The key for any business is to access the cheapest form of funding first and then work upwards based on the purpose of borrowing and the Return on any Investment.
In order of cheapest to most expensive:
- Trade Creditors. Wherever possible gain the maximum amount of credit from your suppliers as you can and ideally more credit than you give to your customers.
- Overdraft to fund working capital.
- Invoice Discounting to fund working capital.
- Term Loan to fund Assets.
- Asset Finance to fund plant machinery / cars etc.
- Peer-to-Peer / Crowdfunding type opportunities
- Equity to support acquisition or growth. This is the most expensive form of debt as you are giving up a percentage of the future value of the business.
As detailed above, there are also many professionals in the UK that are well versed to support you find the right funding solution. Again, this can be a difficult decision so that is why we here at biz4Biz are ready to support you in having a discussion on raising finance.
About the Author
Ian Taylor is a highly experienced Business Advisor and Financial Services Professional, with more than thirty years’ expertise in Senior Executive roles with Barclays and BNP Paribas: building successful and award winning teams, developing robust, long term client relationships, and leading a series of complex market related projects to support clients to grow.
Amongst extensive professional training, highlights include successfully completing the Larger Corporate Business Programme at Henley Management College as well as the prestigious Insead CEDEP General Management Programme. Ian is an Associate of the Chartered Institute of Bankers.