Finance options for growing businesses
24th March 2015
Fast-growing companies often need access to additional capital in order to maintain their expansion and achieve their business objectives.
With this in mind, what options are available?
Whilst the high street banks are increasingly active in the SME lending marketplace with economic conditions easing, challenger banks are emerging and a number of other alternatives to mainstream lending have appeared in recent years and are starting to grow in popularity.
One of the most prominent of these – particularly in the SME market – is arguably peer-to-peer lending.
Peer-to-peer lending sees funding sourced from pools of private investors brought together via the internet.
To raise funds this way, a borrower registers with a website platform and uploads information about its business and its funding requirements.
Investors registered with the platform can then bid to take part in the funding. Often the starting amount they can invest is fairly small. This way an investor can spread its risk by potentially investing in a number of separate loans.
The transparency and relative informality of peer-to-peer lending makes it an attractive option to early stage businesses and SMEs.
However, it tends to be more expensive than bank funding because investors are looking for a higher return on their money. Another attraction for borrowers is that there may be fewer requirements to put up security.
Crowd funding works on similar principles to peer-to-peer lending in that it involves a number of investors putting in money, usually via an internet platform. However, this investment is normally in exchange for equity in a business rather than a return on a loan.
One of the attractions of crowdfunding to a borrower is that the formalities of putting it in place may be less than other forms of equity raising such as formal listings.
Crowdfunding is also usually used in business start-ups or early stage companies with growth prospects since investors will want an appropriate rate of return for the risks involved.
There is also the fact that your company will have a more diluted shareholder base, which has the potential to create problems further down the line when wanting to make important decisions about the future of the business.
More mature businesses which have an established customer base and are looking for working capital may be more likely to go down the route of invoice financing. This market is very active with more entrants emerging.
Invoice financing involves a company discounting its invoices to obtain working capital. It is relatively flexible in that it works on the basis of the turnover of invoices from time to time.
Where capital is required for investment in new piece of machinery or equipment, asset-based funding can be a useful option.
Generally speaking, where funding a specific physical asset, this method of financing will probably be the most cost-effective option.
High street banks as well as specialist lenders are offering both asset-based finance and invoice financing and with the funding landscape increasingly fluid, we can expect further changes in the years to come, not least with the emergence of challenger banks and internet-based funding.
* This article first appeared in a supplement on the Yorkshire Fastest 50 Awards 2015.
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