Applying for funding can be a complex and time-consuming endeavour, but the potential benefits to your business are huge. Here’s a short guide to help you through.
Produced in association with Experian.
Funding fuels growth
Starting a business isn’t easy, but growing it can be even harder. Micro-business owners are frequently forced to work part time, leaving them unable to devote the time necessary to expand. SME owners struggle too, often lacking sufficient cash to fuel new business efforts.
Funding is the solution – giving owners the resources to improve the scale of their marketing, customer acquisition and service delivery. But while owners may be convinced of the potential of their business, lenders and investors need hard evidence of success before they’ll part with their cash.
Checklist: before you start
As with any long-term project, planning is key to success. So it’s important to complete a few steps before you begin:
1) Check your business credit report
- Your credit score will play a key role in reassuring lenders / investors that your finances are healthy.
- Experian provide credit checking facilities and is also offering a 30-day free trial of My Business Profile for SME Insider readers.
- The check will provide you with key insights on how to improve your credit score if necessary
2) Ensure your business plan is watertight. Ask yourself:
- How much money do you need?
- What will you do with it?
- When and how will you repay the loan?
- What will happen if you don’t get the loan?
3) Get your paperwork in order
- Barclays recommends preparing your business plan, business trading accounts and profit / loss details, and keeping them on hand during the process. The more information you have about your company, the better.
Option 1: Apply for a bank loan
According to a Close Brothers report on the SME funding gap, bank loans remain the most common source of funding for SMEs looking to grow.
However, this isn’t always the most reliable source of cash. The same report found that one in four SMEs had been turned down for funding from traditional lenders, for several different reasons:
- Cash flow not considered strong enough – 27%
- Banks not lending to SMEs at the time – 23%
- The SME doesn’t have enough capital – 20%
- Business plan isn’t robust enough – 19%
Option 2: Use the Bank Referral Scheme
The Government’s Bank Referral Scheme is designed to help businesses who have been rejected by major banks find funding from other sources.
If your application to a traditional bank is unsuccessful, they must now refer you to one of three finance platforms, which will work with you to find a bank that suits your needs. This could be another bank, or an alternative finance platform such as a P2P lender (see below).
Rob Straathof, CEO of finance provider Liberis, thinks it’s a step in the right direction: “Small businesses are the lifeblood of the UK economy, but too often they’re held back by the complicated and cumbersome finance process of the major providers.
“This can see SMEs rejected based on how long they’ve been in business or whether they fit the bank’s own specific model, not down to their credit rating or the value of their business model. If this isn’t resolved the great gains that small businesses, start-ups and the self-employed have made over the last few years could be put at risk. The Treasury’s new Bank Referral Scheme is a welcome step in the right direction and means SMEs can go forward with confidence.”
Option 3: Alternative Finance
According to the Pushing Boundaries report by Nesta, the alternative finance industry was worth a total of £3.2bn in 2015. Small businesses should be particularly interested in crowdfunding and peer-to-peer (P2P) lending as alternative sources of finance.
Crowdfunding gives lots of investors the opportunity to invest a small amount in your business to help you reach your funding total. You’ll have to compensate these investors – usually with shares in your companies or an exclusive offer or product. If your business has a compelling proposition, this can be an astonishingly fast and effective way of getting funding. Last year, UK mobile bank Monzo raised $1m in just 96 seconds via Crowdcube – the fastest crowdfunding raise in history.
P2P lending platforms connect investors directly with businesses looking for funding, increasing your visibility and giving you access to a huge database of potentially relevant investors. FundingCircle has now lent over £2.5bn to more than 25,000 businesses.