Obtaining a business development loan can be difficult in the UK in the present economic climate. This article looks at the key sources of business development loans and how to access this type of funding.
The main starting point for most businesses when thinking about raising any kind of loan, including those for business development, is to approach their bankers.
Banks will normally be seeking some form of security to back up a loan of any size to an owner managed business or SME. If sufficient security can be provided and the bank is satisfied with the proposed plan and projections then this sort of funding should still be available from most banks.
If there is not sufficient security available but the project would otherwise fit the bank’s criteria, then in theory use of the Enterprise Finance Guarantee scheme may be appropriate. Under this, and its predecessor, the Small Firms Loan Guarantee scheme, the Government will provide the lender with a partial guarantee of the loan in place of their normal security. Unfortunately however, many lenders appear to have been reluctant to use either scheme as they have been perceived as bureaucratic, and critically, the guarantee provided is only a partial one so the lender remains at risk for part of the loan.
Publicly Supported Development Funding
Publicly funded development support can come in the form of soft loans at favourable interest rates or repayment terms, equity investment channelled through development agencies or outright grant funding which has the great advantage of not needing to be paid back if you comply with the conditions attached to it.
Most public funding of this type is targeted at business development projects of one sort or another. Sums awarded tend therefore to be linked to projects such as training, new product development, or investment in plant and equipment, particularly where this will help reduce your carbon footprint.
Whilst the sums that can be raised are substantial, and can involve both support for purchase of plant and equipment, and wage subsidises in respect of jobs created, secured or saved, obtaining any form of public funding can be a time consuming and frustrating process starting with the basic question of what you may be entitled to apply for.
There are literally thousands of different schemes across the country from Government run ones administered by everything from local authorities and Regional Development Agencies, through to the Princes’s Trust and other non-government organisations; and quangos such as the National Endowment for Science, Technology and the Arts (NESTA) or the Carbon Trust.
Each funder has its own objectives and application process and there are therefore specialist consultancies active in helping businesses identify the schemes that may be open to them and to manage the application process on their behalf so as to give the best chance of raising funding.
This type of funding also has its own particular characteristics which you need to be aware of. Little funding is awarded retrospectively so you need to complete the process and secure your award before you start your project. Very few schemes will provide 100% of the funding required so you will also still need to have raised the balance elsewhere. Worse still, as the claims payment process is usually a retrospective one, you will usually have to fund the full cost of the project from your existing resources, before being able to seek reimbursement of the funded element.
Cash Flow Loans
Cash flow loans where a lender provides a facility solely on the strength of the forecast cash flows are rare in the SME and mid-market sectors, where as discussed above, other than at very small levels, banks will usually want loans to be supported by assets as security. Such loans can therefore be used to support business development.
Factors and invoice discounters were sometimes, pre-credit crunch, offering some cash flow facilities in relation as part of funding for buy outs and other transactions in the shape of loans repayable over two or three years. While this is less common, they will still often consider providing temporary facilities by way of an ‘over advance’ against the ledger.
The practice of ‘block discounting’ which involves providing an advance against a future stream of contractual cash flows is now restricted to a very small number of funders, although there is a strong source of finance for this type of situation at levels of £10m and over.
A small number of VC firms are also prepared to provide high interest loans on a cash flow basis, either for business development or to deal with distressed situations. These sources provide an alternative to business angel equity and so, despite the high cost of the money involved, they avoid dilution of the owners’ equity. This is a very specialised market where there are only a limited number of deals done so you will need to speak to your professional advisors if you think this may be of relevance to your position.