How can I fund my business when my bank won't lend to me?

9 February 2010

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This is a question we often hear from our members who, having tried to source funding from the banks, have met with caution and even had their existing funding arrangements withdrawn or reduced with little or no notice.

Nevertheless, we always advise that your first port of call should still be your bank. If they are not forthcoming with funds, shop around the other high street banks for a better deal.

However, there are other options for funding your business, which may be worth considering. Which one is suitable for you will usually depend on the end use of the money:

Government funding

The Enterprise Finance Guarantee (EFG) scheme will be extended for a further 12 months from April 2010, making an additional £500m of credit available to small and medium-sized businesses. For more information on eligibility and how to apply for the EFG scheme, click here.

You can also potentially get help towards employment costs from Jobcentre plus, if you take on a new employee who has been long term unemployed. Find out more about this scheme here.

Grants

Grants for training and, in some cases, equipment are available from the Government and EU, and your local Regional Development Agency.

There are five main grantable areas: research and development (see below), regional investment, energy efficiency and environment, training and logistics.

If you would like grants consultancy, you can contact the FPB helpline on 0845 130 1722.

Asset finance

This allows you to borrow against assets owned by the business. Leasing arrangements are essentially rental agreements with the finance company, however, it may not be for the full amount that the equipment costs.

This can work two ways. The lender either buys an asset from you and you rent it back, or you borrow against your asset but are still allowed to use it.

Research and development

The Government encourages innovation and research and development, so if you're planning to research and develop new products or services, you could be eligible for financial support in the form of a research and development grant.

It may also be possible to obtain matched funding from universities to aid research into new products.

Invoice finance and factoring

Late payment is one of the main causes of poor cash flow. Invoice finance effectively frees up the money tied up in your unpaid invoices. However, you'll typically only receive 90% of the value of the invoice.

Factoring allows you to sell your debt to another company. The factoring company pays you immediately and gets the money from your customer when it's due, though they will charge you a percentage fee.

Investors

If you've got a winning business idea, you could take the Dragon's Den route and try to gain private investment. Unlike banks, an investor will expect a substantial share of your business in return for their investment, which may involve relinquishing total control.

The plus side is that you would hope to get not just their money but their expertise and contacts.

Personal sources

You may be able to find funding from personal sources such as your friends and family. However, if you do go down this route, it is important to do it all formerly by agreeing concrete terms and signing a legally binding agreement.

Be honest

It can be a difficult fact to face, but many small businesses do not attract funding because their profit margins may be quite small. Improving the financial position of your company by careful management of all costs, good credit control procedures and an aggressive sales and marketing policy should help put your business on the proper footing to interest an investor or bank.

If you would like help with accessing any of the areas of finance above, the FPB can provide you with impartial advice. In almost all cases of applying for funding you will need a formal business plan. We can help you to write one although some lenders prefer their own templates. Call our member helpline now on 0845 130 1722 for more information.

How can I fund my business when my bank won't lend to me?

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