The recent economic crisis and subsequent on going recession has impacted upon many businesses and their business recovery and turnaround efforts, even forcing companies to close in some instances. The reluctance of high street banks to lend has meant that newer businesses and start-ups can’t access the funds they need to launch their businesses and even established companies are facing difficulties with their business turnaround and recovery strategies. Even if banks want to lend to businesses, the standards imposed by Basel III will make it harder for businesses to access funds and the new requirements mean banks may be unable to lend in the near future.
For some time now, businesses have been forced to seek alternative funding and various options have emerged to assist recovery. The Funding For Lending Scheme launched by the Bank of England and the Government highlights how important it is for businesses to be able to access funding in order to boost the economic recovery process. The introduction of the Seed Enterprise Investment Scheme in 2011 further exemplifies the priority the government is placing on businesses finding alternative forms of funding. While companies are keen to access funding, many have traditionally relied upon the banks and are now seeking advice regarding what forms of funding may be available to them.
Two options for businesses seeking funding are crowdfunding and invoice trading. Both forms of funding are a move away from traditional bank lending and allow businesses to access funds for business growth and funds for ensuring businesses maintain cash flow. Invoice Trading is aimed primarily at businesses who are struggling with cash flow issues. In recent months many banks have lowered overdraft limits or removed overdraft facilities altogether meaning that even established companies are facing cash flow difficulties. Invoice trading allows businesses to ‘sell’ an invoice or bundle of invoices via an online auction. They gain access to the funds from the highest bidder and then repay the bidder (plus an agreed fee) after a set amount of time. The time is usually limited to 30, 60 or 90 days which allows enough time for the seller to access the funds required to pay the bidder. For example, Nyman Resources provide IT specialists to the banking and financial industries and pay a salary to each of their specialists every month. However, cash flow problems can occur when they are required to pay the salaries before client invoices have been paid. By using Platform Black, Nyman Resources were able to sell an invoice and maintain cash flow. The type of clients who work with Nyman Resources meant that the businesses had a stable credit rating and was able to access the funds on terms that were more favourable than they previously achieved with banks.
Whilst invoice trading provides a viable option for established businesses, alternative options may be required for smaller businesses which require funding to expand or start-ups who are trying to launch a business. Crowdfunding enables such organisations to access funding from a number of sources. By stating how much funding they require and providing information about the business, investors can then pledge how much they would like to invest in the business to aid recovery. A business may obtain full funding from just one investor or from a number of different investors. For example, the drinks start-up Kammerling’s required an investment of £180,000 which it obtained from 23 investors for 23% equity enabling the business to increase distribution.
It is evident, therefore, that companies are now able to access a variety of different forms of alternative funding. In addition to gaining funding, some businesses are even able to access the funds at better rates than they could previously obtain from the banks. Companies such as Funding Circle, Seedrs, CrowdCube, Platform Black and Market Invoice exemplify the range of opportunities available to companies and investors alike. The peer-to-peer lending method allows for greater negotiation than in the traditional banking lending environment and is enabling businesses to thrive despite the recent economic downturn. Although businesses are using these alternative methods of funding whilst banks have been unwilling to lend, the flexibility and availability of these forms of lending may see them becoming the first choice of funding options for businesses, even if the banks increase their lending capacity.
HW Fisher & Company is a commercially astute organisation – ranked as a mid-tier top 25 UK chartered accountancy firm, with a personal, partner-led service aimed at entrepreneurial small, medium enterprises (SMEs), large corporates and high-net worth individuals.
HW Fisher specialises in Business Recovery services, focussing heavily on recovery, insolvency and business turnaround practice.
For more information please visit http://www.hwfisher.co.uk/business-recovery-and-insolvency