O ne of the biggest changes for SMEs in the past ten years has been the issue of business funding. The credit crunch impacted the traditional banks and their operating models, and it all happened alongside an unprecedented technological revolution. This revolution has in many respects “democratised” how businesses are funded. Quite literally in the case of “Peer-to-Peer” platforms, where we can all now very easily act as quasi-banks from the comfort of our homes, should we have the desire and the funds. However, for all the change and despite the fancy names and individual quirks, it still pretty much comes down to debt or equity. The pros of debt: control is retained by the owner. All the lender really cares about is getting their interest and, eventually, capital back. The cons of debt: interest is a drag on profits each year and, at some point, capital has to be repaid. Even, in extremis, if that means being forced in to administration. Ouch.
Finally, it’s still essential to consult and take advice. There are an interesting number of options for alternative sources of finance. New entrants are arriving and the boundaries between them blurring. At the same time, there is now evidence that the banks are recognising the need to compete, meaning that they too are changing their approach. Reviewing how your business is capitalised is a fundamental part of the business plan. It’s something to look at least annually and we can assist you with this process. For advice on obtaining investment or finding projects and opportunities to invest in, Scrutton Bland Corporate Finance team has the experience and access to networks to help. Contact Luke Morris on luke.morris@ scruttonbland.co.uk tel 01206 838466 .
The fundamentals are still there: Angels are about speed, the chemistry and fit of the individual and the expertise they can bring to bear, and the fact that they will be around for the long term – they are putting their own money in. Friendly, or at least understanding, capital. We are seeing a number of fresh initiatives in this area, including the growing local network of Angels locally, New Anglia Capital (see page 6), being worth a look. In conclusion Whilst there have been a number of changes in the state of business funding for SMEs in recent years, some fundamentals remain. Ultimately it is still about debt and equity, getting the ratio right and matching it correctly to your operations. And you still need to read the small print carefully. It’s still an art to balance the factors when looking to obtain: terms, availability, speed and costs. And it’s still demanding of personal communication skills, even if via an online platform.
Of course, it’s not all plain sailing, and you do need to watch the costs. But nonetheless we are seeing clients increasingly consider this when re-financing, which we did not see two or three years ago. Business Angel Investment It is estimated that there are 18,000 Business Angels in the UK. Business Angels are individuals, putting their own money (but also, their time) into an early–stage venture in exchange for a piece of the pie. “Nothing new there” I hear you say. And you would be right. What is new, however, is how the Angels are behaving. Technology, again, has had a huge effect in the last decade. Angels are increasingly working together, in syndicates, as it’s easier for them to communicate and network online. This means they are prepared to look further afield, and in acting together they will consider larger investments, or investments outside of their usual comfort zone. Equity investment at a level beyond what would be thought of as the usual Business Angel “start-up” space.
The pros of equity: share capital, conversely never has to be repaid. And dividends on shares are discretionary – they can be shelved during the hard times. The cons of equity: there’s a price to pay – as anyone who has seen Dragons’ Den knows, the pressure to deliver from demanding shareholders and the returns they expect may be significant. And keep in mind the fact that if you issue shares and dilute your holding, the company is no longer all yours. All pretty basic stuff for the seasoned business leader. But having decided on debt or equity, what other choices are there these days when we drill down further? Quite a few, as it happens, and I want to pick just one example from each category that seems to be garnering momentum at the moment: Peer-to-Peer Lending (debt) and Business Angel investment (equity).
Peer-to-Peer (P2P) Lending Even the most optimistic high street bank manager will admit there has been a change in the “relationship banking” model in the past decade, one implication being that the banks are no longer the only players when it comes to providing debt finance. And businesses have noted the traditional banks becoming more conservative again when it comes to lending criteria. Online platforms to raise debt have exploited this niche, with their lower fixed cost base and the reach and speed of online technology allowing them to match borrowers and lenders, providing a direct alternative to a traditional bank loan. It seems P2P is more than a flash in the pan. Gross lending in 2015 via these platforms was up 75% on the year before and that trend looks to be continuing. I think it’s definitely here to stay – there are a number of flexible products available now and in many cases it can be quicker and easier.
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