Just as parents of young, growing children always seem to be needing to find money new shoes and clothes, so owners of young, growing businesses may have a need to find money to make the most of new growth opportunities. Unfortunately, this isn’t necessarily as easy as it sounds. Fortunately, there are still opportunities if you are prepared to cast your net further than the high street. Here are some options and what they mean in practice.
High-street lenders may be everywhere you look, but that doesn’t mean that they’re going to accept everyone who walks through their doors. The harsh fact of the matter is that the average high-street lender was never that keen on lending to young businesses even before the 2008 financial crisis and they are even less keen on it now.
While it may be tempting to blame this on regulation, it is also worth pointing out that at least some of the companies which are unable to access finance through the mainstream then go on to access finance through niche lenders, which suggests that the underlying issue is not the regulation itself, but the general unwillingness of mainstream lenders to take the time to understand growing, young businesses.
To put the matter in simple terms, high-street lenders tend to work on volume-based business models and these require a certain level of speed, which is dependent on a certain level of automation, in the form of computer algorithms such as risk-scoring models and this approach is unlikely to work for growing young businesses.
Niche lenders are, essentially, the Credit Unions of the business-finance world. These are the people who work on value rather than volume and hence will take the time to understand the businesses with which they work and form an assessment of their risk which includes “intangible” factors such as the quality of the management (and its previous track-record) rather than just “standard” financial indicators, such as years and years of excellent financials, which growing young companies are very unlikely to have purely and simply because they are too young to have them.
Niche lenders may have headline rates which are higher than those advertised by the high-street banks, but in reality, they can actually work out to be the more affordable option for growing, young companies partly because these companies are highly unlikely to qualify for the best mainstream rates (or, indeed any rates) and partly because niche lenders tend to have a much more user-friendly application process, which cuts the time to acceptance and hence allows companies to take advantage of opportunities which can arise at short notice and demand quick action. Victor Finance, for example, has their “Own book lending” system, which is significantly more attractive than the offerings from the mainstream banks.
Venture capital/crowdfunding/other investment
Venture capital has been around for centuries (if not longer) and crowdfunding is essentially a modern spin on it. Essentially where venture capitalists may pay larger sums of money to hold meaningful stakes in a business, crowdfunding investors are more likely to pay smaller amounts to hold smaller stakes, although the overall level of investment may be the same. The main issue with both of these funding models is that they tend to require the founders of a business to give up some degree of control over their business, which they may or may not be able to get back at a later date. There might be an argument for this if the company can bring on a useful venture capitalist, which can, essentially, contribute to the growth of the company (as in Dragons’ Den) but otherwise, it can create issues the existing owners might prefer to avoid.
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