Clive Lewis, Head of Enterprise [email protected]

Alternative Sources of Finance Making it big in business

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Alternative Sources of Finance Presentation will cover: • Do you need finance or better financial management? (slide 3) • Key questions before raising finance (slide 4) • Risk Profile (slide 5) • Start-up & Early Stage Finance – the Alternatives (slide 6) • Bank, Asset & Equity finance (slides 7 – 9) • Bank’s Appeals Process (slides 10 - 11) • Lesser known sources of finance (slides 12 - 17) • On-line sources of finance (slides 18 - 29) • British Business Bank (slide 30) • How an accountant can help you access finance (slide 31) • ICAEW Business Advice Service (slides 32 - 34)

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Do you need finance or better financial management? • A business should have a continuous focus on cash flow

• Good practices and clear lines of responsibility are important. • Have clear credit agreements with customers and suppliers • Have a system for following up late receipts from customers • Knowing your current bank balance and how you expect it to change over next 3 months is vital • Good financial management not only helps manage cash it will reassure finance providers • A growing business can mean increased working capital. Arrange your finances to meet any increased need.

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Getting the appropriate finance for your business Key questions to consider before seeking finance: • How much are you looking to raise? • Are monies needed for short or long term needs?

• Are monies needed for growth or just to sustain your business? • Are you prepared to offer security over an asset being personal or business?

• Are you prepared to bring in an outside investor and give up either a minority or majority stake? • How do you plan to repay the finance? BUSINESS WITH CONFIDENCE © ICAEW 2012

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The business’ risk profile matters. • Banks use a variety of information to assess risk

• Behavioural scoring data (how accounts are run, facilities repaid and evidence of a drop in turnover) • Credit reference data also referred to (paying suppliers later, court judgements, late filings at Cos House)

• If the business is a limited company, finance providers will look behind the company at the directors credit history

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Possible types of Start-up & Early Stage Finance • Your own personal savings • Friends and Family • Credit cards • Credit Unions • Grants (usually for specific groups of people or sectors)

• StartUp Loans • Bank finance – overdraft or loans • Invoice Factoring and Discounting • Hire purchase , leasing or hiring

• Small scale equity finance such as Business Angels • Crowd Funding or Peer-to-Peer Lending

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Getting the appropriate finance for your business

Bank and Invoice Finance Loans - Normally secured by a charge over asset(s). Often has conditions attaching to the loan (“covenants”) which can trigger a demand for immediate repayment if they are not met. Overdraft -The lender offers a facility with a limit with an agreed interest rate and probably secured. The business can dip in and out of the facility up to the limit. Debt Factoring – To consider factoring the business needs debtors with a good credit record. The factoring company pays a percentage of the debtor book immediately to your business. Factor chases debt Invoice Discounting allows the business to administer the sales ledger and the customer is unaware that the debt has been discounted.

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Getting the appropriate finance for your business

Other Asset Finance Outright Purchase or Deferred Payment -asset(s) can either be purchased outright or paid for by instalments. There are various types of deferred payment - hire, hire purchase or leasing. Mortgage – normally be used to finance a property acquisition or to expand an existing business premises. Similar to a bank loan with the mortgage usually being secured over the premises. Loan to value ratios vary but unlikely to exceed 70%

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Getting the appropriate finance for your business

Equity Finance Self funding, friends and family -Business owner with their own funds or those of friends and family, inject monies into your business. This can be by way of a loan or equity finance. Must put agreement in writing

Small Scale Equity Finance - businesses sell a share in the business to friends, family, business angels or other private investors. They must be prepared to allow others a say in how the business is run. Business angels bring (up to £2 million) finance to a business and they normally have experience in what makes a successful business

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Getting the best from your bank If refused credit by a bank

• Get a written explanation for the decision • Consider requesting an appeal – 40% of appeals result in the decision being overturned frequently because business provides additional information.

• Bank should offer suggested alternative sources/types of finance • Review banks feedback and consider applying to another bank or source of finance

• Ask is equity finance the way forward?

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Getting the best from your bank • All major UK banks have agreed a set of principles if your formal application for finance has been refused and you appeal the decision • An independent and external team of reviewers monitor the principles and the banks application of them • The appeal is reviewed by a second person from the bank not involved in the original decision

• The reviewers have 30 days to communicate the result of your appeal to you. • 40% of appeals reviewed in the first year resulted in the original refusal being overturned. In a majority of these cases this followed additional information being submitted. • For more information ask your bank or look on the Better Business Finance Website – www.betterbusinessfinance.co.uk BUSINESS WITH CONFIDENCE © ICAEW 2012

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Own Personal Savings & Friends & Family • Business owner with their own funds or those of friends and family, inject monies into your business. People who have previously run a business are often more prepared to lend / invest • This can be by way of a loan or equity finance • It is important to understand the expectations of the family and friend on what they will receive back and when. To avoid arguments put the key features of the arrangement into a written agreement

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Start-up- Loans • Start-Up loans are loans aimed at start-up businesses. This scheme started as only for 18-30 year olds, but has now been extended to all ages. Applicants must be living in England and looking for finance to start a business. • After applying on-line a Delivery Partner is selected to identify what stage the start-up is at in the ideas process, and help them present their business proposal to a panel where they will pitch for a personal loan • Originally the maximum amount was £2,500 but this has been increased to a maximum of £25,000. The loans are typically less than £10,000 and average around £5,000 at present Start-up Loans - http://www.startuploans.co.uk/ BUSINESS WITH CONFIDENCE © ICAEW 2012

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Credit Cards • A regular source of finance for start-up businesses • Often used for items such as travel, stationery, petrol, car repairs

• A good way of smoothing out unexpected big bills • Allowing debt to get out of control will damage a business owner’s credit rating

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Credit Unions • Association of British Credit Unions (ABCUL) website provides information regarding location of member credit unions and their services • Some larger CUs offer current account facilities • Savers in a CU (usually for a period of at least 3 months) will allow you to access lending facilities.

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Community Finance Community Development Finance Institutions (CDFIs) provide community finance tailored to the needs of businesses in deprived areas, owned by entrepreneurs from disadvantaged communities or unable to access mainstream finance • Most CDFI business loans unsecured • Banks now routinely refer businesses refused credit to CDFIs • CDFIs can help business owners become “finance ready” More information including finding the right CDFI and an on-line application for finance go to:

Community Development Finance Association • http://www.cdfa.org.uk/ BUSINESS WITH CONFIDENCE © ICAEW 2012

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Grants • Grants and support tend to be sector specific, so your trade body or association are a good place to make enquiries • The Local Enterprise Partnership should also be a first port of call for grants and training courses • Technology and green projects can be incentivised

• The government offers help with moving from benefits to work/ self-employment and the Job Centre Plus will have details. • The GOV.uk website has a “Business finance and support finder”

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Newer online sources of finance: • Debt funding • Equity finance • Working capital funding – factoring & invoice discounting Seeking to match businesses looking for finance with individuals and businesses looking for diversification of risk and yield. Business models vary. Vital to understand how risk of proposition has been assessed. Cost proportionately higher than bank finance but risk often greater. Internet Finance not within the Financial Services Compensation Scheme

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Debt Funding (or Peer to Peer Lending) through the Internet • Applicants fill in on-line application form

• Acceptance criteria vary but for Funding Circle will include the following: – Must be UK based limited company – At least two years financial reports

– Making a profit and a good credit rating – May require up-to-date management accounts – Details of other loans and commitments

– Responses are usually quick. Funding Circle says it’s credit assessment team will give an answer on the application in 2 days.

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Peer to Peer Lending – On acceptance • Once accepted for entry loan applicants enter auction in a marketplace. A risk rating is applied to guide lenders • Registered lenders start bidding the amount they are prepared to lend and the interest rate they expect to be paid • As bidding intensifies the interest rate tends to drop • Applicants can accept the loan as soon as it is fully funded . Alternatively the loan can be kept live for 14 days to see if the rate drops further • Once loan accepted applicants can expect the money to be in their bank accounts. This varies from same working day to two weeks • An arrangement fee – either a percentage of the loan or a fixed amount – is charged on the loan.

• The applicant repays the loan to the peer-to-peer lender who is responsible for distributing the repayments to all lenders involved in the loan

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Peer to Peer Lending Some providers :

• Funding Circle – loans £5,000 to £500,000 www’fundingcircle.com • Thincats – loans £50,000 to £1M – www.ThinCats.com • Rebuildingsociety - £2,000 to £50,000 to cos with turnover over £200,000. www.rebuildingsociety.com • FundingKnight – loans £25,000 to £100,000 to well established SMEs. www.Fundingknight.com • Wonga for business – short-term loans to £30,000 www.wongaforbusiness.com

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Peer to Peer Lending Vs Bank Finance Advantages over bank finance: • Application process is generally quicker • Generally less onerous security requirements Disadvantages over bank finance: • Interest rates generally higher particularly where security and guarantees not available • Arrangement fees higher For lenders: • P2P in early stages so bad debt levels low. • Bad debts not tax deductible for lenders • But some P2P lenders have central fund to help mitigate bad debts

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Equity finance (Or Crowd Funding) through the Internet Businesses seeking equity must:

• Complete a questionnaire specifying how much finance required and the equity on offer • The disclosures are reviewed to ensure they are fair, clear and not misleading. Listing is then approved

• Investors can invest from up to the full amount required • If full amount offered within a specified period go to closing, if not investors get money back • In closing legal due diligence is conducted and business signs documentation and on-line platform subscribes for shares on behalf of investors

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Crowd Funding Continued • Fee for obtaining finance paid at this point

• Post-investment online platform holds shares as nominees for investors. • Dividends or when business floats or sells out the on-line platform passes the proceeds back to investors

Some on-line equity funding: (eight in UK, these two are FCA regulated) • Crowdcube – www. Crowdcube.com Raised £11m for 60+cos with 42,000 registered investors

• Seedrs – invests in seed-stage start-ups seeking up to £100,000 of equity- www.seedrs.com

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Other Points on Crowd Funding • Tax breaks such as Seed Enterprise Investment Scheme (SEIS) can make Crowd funding more attractive • Issues with second round funding with so many first time shareholders. • Research indicates that around 50% to 70% of business startups fail completely. Likelihood is that investors will lose all their money. • FCA intention is to restrict financial promotions for unlisted shares or debt securities to sophisticated investors, high net worth individuals, investors taking authorised advice and to limit investment in this class to 10% of net investible portfolio

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Working capital through the Internet Lending usually based on factoring and invoice discounting or selling future credit card income Factors & invoice discounters include • Marketinvoice – www.marketinvoice.com • Platform Black – www.platformblack.com

• Receivables Exchange – www.receivablesxchange.com

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Working capital through the Internet Credit card companies include Boost - Business supplies evidence of recent card turnover - Boost makes an offer of a cash advance based on turnover - Boost agree to by future credit/ debit card receivables at a discount - Daily repayment made via small fixed percentage of future credit/ debit card sales - Business advises card processor to send settlement funds to escrow account - Funds collected and remitted through a proprietary escrow service using Barclays AMS client account

www.boostcapital.co.uk

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E-Invoicing, debtor management & arranging finance Various packages available. Following is Bilbus • Create a sales invoice or upload from a template • Invoices can be electronically submitted to customers in a number of ways including by email direct from your accounting platform or integrating with accounting platform and sending direct to customer portal • Platform sends automated reminders to customers • Customer updates to status of invoice in their system can result in automatic update of your collections forecast • Platform provides feedback on customers’ payment performance and cost of outstanding debt • Platform can be linked to an application to a finance provider BUSINESS WITH CONFIDENCE © ICAEW 2012

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Recent Developments in Internet Finance • The Financial Conduct Authority (FCA) has issued a consultation paper on regulation of the sector scheduled for early 2014. • Discussions likely to focus on areas such as establishing standards for credit checking procedures and minimum capital requirements • Concern that too strict standards will push up costs making alternatives forms of finance more attractive.

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British Business Bank • The British Business Bank has been formed by the UK government and will control £2,8 billion existing government finance schemes and will get £1 billion in new funding. • Working with 70 partners, it uses its funds to unlock finance for thousands of smaller UK businesses • http://british-business-bank.co.uk/applying-for-finance/

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Getting finance – how might an accountant help? Many accountants offer advice on business finance. An adviser can help with: • Reviewing the business to identify its financing status and needs • Identifying the most appropriate sources of money

• Guidance on investor expectations and attitudes • Preparation of the business plan and of the live presentation • Mentoring through the funding and due diligence process They will make a charge for the work – ask for a quote before you ask them to help. BUSINESS WITH CONFIDENCE © ICAEW 2012

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ICAEW Business Advice Service (BAS) ICAEW firms displaying this logo:

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ICAEW Business Advice Service • BAS offers an initial consultation for businesses and start-ups with an ICAEW Chartered Accountant free of charge. • An opportunity to discuss your business issues with a finance professional • Discussion can cover business issues from record-keeping to managing cashflow

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ICAEW Business Advice Service Go to:

businessadviceservice.com Or email: [email protected] To find BAS firms in your area.

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