Funding for business – a banker’s perspective

In 2019, John Walsham joined Kreston Reeves following a 36-year career with one of the major UK banks.  He has worked with businesses of all sizes helping them secure funding.  Here, he offers a unique insight into the funding options available to fast growing businesses.

Businesses may, to an outside observer, look very much alike, perhaps operating in similar sectors and being the same size.  But, just like the people they employ, no two businesses will be the same.

So when a business is looking for funding to support continued growth, no one size fits all approach will work.  Responsible lenders will want to review a wide range of factors including, understanding the business model, its vision and goals, sector dynamics, assets held by a business, and the owners’ commitment before making a lending decision.

With this information, funding will typically fall into one of the following options.

Overdraft

Overdrafts will be familiar to most businesses and they are, at their most basic, a line of credit agreed for a predetermined period of time.  They are flexible and relatively quick to put into place.

Business loan

A loan is typically agreed with a specific aim in mind – for example, to purchase a property, business assets or research and development. Repayments are fixed, which helps with budgeting, and can be for terms of up to 25 years.  Businesses should review their loan commitments regularly, comparing rates and the options to redraw a loan having made payments over a number of years.

Invoice discounting

Invoice discounting enables a business to immediately access up to 90% of the value of an invoice, aiding working capital.  The facility will typically grow with the business assisting further expansion.

Stock financing

Some lenders will view a company’s purchase orders as tangible assets and lend against them.  The lender will want to track the end-to-end transaction and understand the ‘who you buy from and who you sell to’ question – before agreeing to lend.

Asset finance

Machinery and equipment are integral to many businesses but finding the cash to buy them can be challenging.  Asset finance options allow a business to obtain the equipment needed to support continued growth via a number of alternatives including leasing, hire purchase, and sale and leaseback.

Other funding routes

Bank funding will not always be at the right level or with the right rates, so businesses will often look to other sources of capital.

The most common routes are:

• Equity investment. Finding the right investor with complimentary skill sets can accelerate growth.  Investors will, however, expect a business owner to give up some of the value of a company, either at the time of investment or in the future.
• Equity crowdfunding. Typically managed via an online platform, equity crowd funding allows a larger group of investors to invest in return for an equity stake.
• Peer to peer. Again, typically managed via an online platform, investors effectively make a loan to a business receiving interest on their investment.
• When buying a business, it is often possible to raise funds against the assets of the acquired business.
• Regional Growth Funds. Businesses should not overlook the various pots of government funding that are available.  Funds tend to seek to stimulate business growth and job creation and will often need match funding.

There are many different funding options for fast growing businesses, all of which will have implications on future activity.  It is recommended that businesses take independent advice from their accountant before making a commitment.

For more information contact John Walsham, our Business Development Consultant who can advise you with your inquiries.