Growing Or Starting A Business In A Tight Credit Market


officeUK SME’s and startups have been stressed since the outset of the recession. Government initiatives like Project Merlin and the Funding for Lending Scheme have fallen woefully short of meeting the finance needs of small and startup enterprises. It is no wonder that the employment dilemma is prolonged and tenuous.

In the UK, there are 4.8 million SME’s. These companies employ more than 60 percent of the workforce and represent 50 percent of the country’s GDP. How can the economy truly recover if small business growth is curtailed?

The banking sector in the UK is sitting on assets amounting to 492 percent of the UK’s Gross Domestic Product. No matter how you view this situation, UK banking is too big to imagine, much less be productive. And, in this grotesque largesse, banks continue to turn away applications for funding for viable small enterprises and just about all startups. In this sense, our banks are working against society.

About 90 years ago, Winston Churchill declared; “I would rather see finance less proud and industry more content.” If there was ever a time for the banks to respond this is it, but small business and startups understand the banking industry is not about to intervene.

In the US, businesses receive 80 percent of their funding from capital markets. In the UK, businesses obtain 80 percent of their financing from banks. In the US, business is growing. In the UK, we finally see some signs of expansion but this recovery is fragile at best.  Unless SMEs are healthy, this recovery will be temporary. Consider the recent proclamation by former Financial Services Authority Chairman, Adair Turner, who described banks as “socially useless.”

SMEs and Startups Must Be Creative and Innovative 

The failures of the government and banking sectors to rise to the fore on behalf of small business have taken a devastating toll on society. Analysts report that small business can add another  2 million jobs to the economy.

Despite financing difficulties, entrepreneurs are finding ways to launch businesses. Not all succeed. The problem is that the ones that do succeed or that could succeed cannot increase overhead, add employees or grow because they do not have the necessary capital. In the long run, these business will fail.

SMEs are smart to look from other sources for their funding. A survey from The New City Network revealed that UK entrepreneurs have become much more creative and innovative when it comes to finding startup capital and investment for growth. The City survey indicated that 93 percent of rejected loan applications by small businesses only approached banks for conventional loans. There are other alternatives for UK small businesses and startups.

One popular trend is partnering with larger businesses. This can be an effective strategy for startups or growing small businesses. UK large businesses are sitting on £750bn in deposits. If small businesses can get a small portion of that capital to work for them, jobs will grow, the economy will grow and a more stable recovery will be underway. Partnerships are a concept that many small businesses should consider.

Creative Financing Alternatives

Below are commonly used alternatives to bank financing:

Friends and Family – Borrowing from friends and family is risky but might be a solution for the growing or starting enterprise. The trick is to be sure that these debts are repaid. If the entrepreneur does not strongly believe that the obligation can be met, this is a bad way to proceed. For these loans, it is best to approach friends and family members with business experience. Show them the courtesy of sharing your business plan and pledging to repay with a personal guarantee or secure the loan with equity in the enterprise.

Peer to Peer Lending – P2P lending or crowdfunding is the most exciting of these alternatives. Private lenders make loans to small businesses through an intermediary network. The lender will most likely want equity in the enterprise. If the loan is a straightforward loan, the lender will seek a favorable rate of return. Crowdcube and Funding Circle are two of the most popular sources of crowdfunding in the UK. Each of these platforms has different standards.

Invoice FinancingInvoice finance has helped many UK small businesses improve cash flow and avoid bank financing. The access to funding is quick, easy to manage and very helpful for businesses that must invoice clients. There are two types of invoice financing; factoring and discounting. Both options provide excellent cash flow. Costs can be considered when setting prices.

Equity Finance – Equity finance involves selling a stake in the enterprise. Investors purchase the stake and also take a share of profits. In many cases, the investor must be consulted before making any changes to the operation.

While many of these options require a release of degrees of control, the entrepreneur must reasonably consider the future of the business if no funding is obtained. Financing for growth is always a risk. Going concerns have opportunities to acquire capital but some control may be relinquished.


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