10 alternatives to a bank loan for growing businesses

The economy is returning to growth but there are concerns that growing businesses cannot access the finance they need to maintain pace.

While banks remain the main source of funding for Britain's businesses, for many this is far from the best solution as they will not be successful or because they won't get the funding on terms which are favourable to them.

Here are ten alternatives to a simple business loan which could help you grow your company.

Debt finance
The type of funding you pursue will obviously depend heavily on the the status of your business, its eligibility, how much you can afford to take on, and whether you're willing to give away equity.

If you want to retain sole ownership then debt funding is likely to make the most sense.

1. ABL
Asset-based lending (ABL) allows you to borrow against the value of your assets, whether that's your premises, stock, machinery or unpaid invoices.

ABL has struggled a little due to perceptions that it is a last resort for struggling companies who need to turn assets into working capital or risk going bust. But attitudes are changing and for many businesses the opportunity to turn invoices into working capital is a useful way to boost growth.

ABL is available from some banks, and other traditional providers include Close Brothers, GE Capital and Investec.

2. Invoice trading 
Not entirely distinct from ABL, invoice trading is a new form of invoice finance which connects you directly with investors through an online portal. Providers say this option is more flexible and transparent than traditional invoice finance, which can often tie you into long commitments.

The two leading players in the UK market are MarketInvoice and Platform Black.

3. P2P loans
Sometimes referred to as “debt crowdfunding”, P2P lending allows savers to lend directly to businesses in return for interest. All you have to do is create a pitch and provide some key pieces of business data and then your platform assigns you a risk band before passing the pitch on to investors.

The benefits of this form of funding tend to be speed and convenience compared to applying for a bank loan, not to mention a higher likelihood of approval.

Funding Circle is by far the market leader in P2P business lending in the UK, although other companies like Zopa, which has focused more on consumers up to this point, are following in its footsteps.

4. Unsecured digital lenders
In recent years a number of business-orientated unsecured lenders have popped up, which allow you to borrow flexibly at very short notice. Companies like Ezbob and Everline use complex algorithms to deliver a lending decision which is much quicker and, they say, more accurate than can be calculated by banks. Money can typically be in your account on the same day.

This convenience comes at a cost though, with high interest rates compared to banks. The maximum you can borrow will typically be around £50,000 so it's mainly useful for relatively small companies or specific short-term projects.

5. Bonds
Bonds have been identified as a key growth area for business finance.

These effectively act as an IOU offering investors, who tend to be individuals rather than institutions, a fixed return on the value of the bond, followed by repayment of the full amount some years later. They are typically used by fast-growing businesses who are confident of future performance.

Retail bonds are those listed on the London Stock Exchange's Order Book for Retail Bonds, and can be freely traded by investors. The amounts raised through this method tend to be particularly large – from £25m to £300m so they are suitable for successful, well-established businesses with a high growth trajectory.

Some businesses go down the route of issuing their own mini-bonds, which are non-transferable (so investors are tied in for the whole period). Hotel Chocolat, John Lewis and King of Shaves have all raised money through this method. Crowdcube, an equity crowdfunding platform, has also launched a service allowing growing businesses to raise money through mini-bonds.

Equity finance
Equity finance is suitable for those entrepreneurs willing to give up a stake in their business to investors. While this might seem unattractive to those wanting to retain a firm grip on their business, investors can also act as mentors who help you take your business in the right direction.

6. Venture capital
Venture capital (VC) funds invest in early-stage businesses with high growth potential. Though they are generally willing to take on greater risks than other investors, they will need to see strong potential for growth in your business, and that you are a capable leader.

VC funding tends to be invested over a number of years and investors will expect you to do all you can to develop a solid return for them, so you will need to be ready to really push for growth.

There are dozens of VC funds in the UK, which has the largest VC market in Europe, but notable ones include Index Ventures and Balderton Capital.

Related: How to pitch your business to VC investors.

7. Private equity
In contrast to VC funds, private equity funds tend to go after larger companies with a well-established historical track record. These take money from institutional investors and buy equity in under-performing private companies which have strong potential to be turned around.

The investment is usually over a long-term cycle and as with VC funds investors will be seeking a strong return so will generally work very closely with management teams to achieve growth. For some entrepreneurs private equity investors can be too much of an intrusion, but others value the discipline and professionalism they can bring to a growing business.

8. Equity crowdfunding
Equity crowdfunding harnesses the money of dozens if not hundreds or thousands of supporters who buy small amounts of equity in your business.

As well as raising the money you need, this has the added bonus of bringing on your loyal customers as an extra set of voices in your organisation.

Many companies choose to use crowdfunding platforms such as Crowdcube or Seedrs. Others have done it independently, with craft beer company Brewdog's “Equity for Punks” scheme perhaps being the most high-profile example.

Others
9. Pension-led funding
If you've got a decent amount of cash sitting in your pension pot then it could be possible to turn this into business funding.

Clifton Asset Management is a leading provider of this form of finance. It allows customers to invest their own pension fund in their business, either by lending money against the value of its IP or buying your company's assets and leasing them back at a commercial rate.

More on how this works here.

10. Autofinancing
It's worth having a really good think about whether you really need funding at all. Even if you think you will need growth finance in the future, if it's possible to keep costs low and margins high then you might be better off waiting.

Not taking on debt has the obvious advantage of minimising costs later down the line, and not giving up equity means you can have a greater control over your business.

If you can prove the success of your model without needing to take on external funding then you could be in a better position later down the line; both because it demonstrates your prowess to investors and also means the stake that you hold will be worth more as a proportion of the company's total value.

Autofinancing can be a difficult concept to get your head around and it certainly won't work for all companies but it can work. For instance German consumer appliance giant Miele, which now turns over £2.5bn each year, has been self-funded throughout almost all of its 100-year history.

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Self-employed work longer hours but earn less

The recession ramped up the number of self-employed in the UK - but a new report has found they work harder for less than their employed counterparts.

Office for National Statistics (ONS) stats today show that the self-employed accounted for two thirds of the 1.1.m jobs created since 2008.

These were primarily in 'professional, scientific and technical activities,' like consultancy and accounting.

Londoners were the most likely to be self-employed, at 17.3 per cent, compared to 16.6 per cent in the South West and 10.8 per cent in the North East.

The research found many self-employed workers were working longer hours for less pay. 

More than 13 per cent of self-employed clocked up working weeks of 60 hours or more - when just 4 per cent of employees did. A third of self-employed people worked 35 hours a week, compared with 23 per cent of employees.

Despite these longer hours, self-employed workers saw their income fall. Their real wage, after tax, fell by more than 20 per cent since 2008.

However this data included failed and failing businesses - which reported a negative income in the 2012/13, distorting the data.

The self-employed population was also on average older than the employed: 43 per cent are aged 50 or over, with an average age of 47 - seven years older than that of employees.

Jamie Jenkins, a labour market analyst at the ONS, said: "More people are now working beyond the normal retirement age of 65," he said. "A lot of people who set up businesses did so in the 1980s, when there was a big entrepreneurial push.

"While we only have anecdotal evidence as to why people are not leaving self employment, many people I ask say they have been self employed for over 20 years or more," as reported in the Telegraph. 

A report last week found that Britain is now the self-employment 'capital' of western Europe with the number growing by more than 1.5m in the last 13 years, and accounts fro 15 per cent of the labour force in the UK. The highest in Europe is Greece, 32 per cent.

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Should we be worried about the self-employment boom?

The UK is becoming the 'self-employment capital' of western Europe, but is it a sign of slack in the economy?

Self-employment is booming in the UK, at such a rate that our workforce could soon look decidedly southern European. 

It climbed 8% year-on-year in the first quarter of 2014 – a jump only shy of those in Slovenia, Cyprus, Bulgaria and Lithuania.

Self-employed workers now make up 14% of the UK’s workforce, according to the research by think tank IPPR, ahead of 10% in France, 11% in Germany and all of the Baltic and Nordic nations.

Britain still pales in comparison to the beleaguered economies of southern Europe, where self-employment is 17% in Spain and Portugal, 23% in Italy and a staggering 32% in Greece. 

But these latest figures will stoke the debate over just how secure the economic recovery is, despite unemployment tumbling to 6.5% and stonking GDP growth.

Around a third of the rise in employment since 2010 has come from self-employment, leading many economists to point the finger as productivity has stagnated and wages still lag inflation. 

The Resolution Foundation, a think tank, estimates the self-employed earn 40% less than the employed.

But there hasn’t been any increase in the number of people self-employed for less than six months since 2012, the Office for National Statistics said last month. 

Much of the increase came from people delaying retirement, with more than half self-employed workers having gone it alone for at least a decade.

If wages really start to recover, rather than edging up in fits and starts behind inflation, then self-employment won’t seem like such a bad idea after all. 

But if that elusive ‘slack’ in the economy stays stubbornly put, the number of people working for themselves, but not at their full potential, should start to jab policy makers into action.

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Health and safety law exemption proposed for the self employed

Stephen Thomas, safety technical consultant at Croner, discusses the ramifications of a proposal to exempt certain self-employed people from health and safety red tape.

Between July 7th and August 31st 2014 the Health and Safety Executive (HSE) has sought views on their proposal to exempt certain self-employed persons from Section 3(2) of the Health & Safety at Work etc. Act 1974 (HSWA).

The proposal arose from the government-commissioned 2011 Löfstedt Report 'Reclaiming health and safety for all', which recommended that self-employed persons be exempt from health and safety law where they pose no potential risk of harm to others through their work activity. If introduced up to 1 million people could be affected.

The current position 
The Great Britain regulatory framework for health and safety, in particular section 3(2) of HSWA, places general duties on everyone 'at work' including the self-employed. Section 3(2) states: 

'It shall be the duty of every self-employed person to conduct his undertaking in such a way as to ensure, so far as is reasonably practicable, that he and other persons (not being his employees) who may be affected thereby are not thereby exposed to risks to their health and safety'. 

Section 53 of HSWA gives a broad definition of a self-employed person. It states that a 'self-employed person means an individual who works for gain or reward otherwise than under a contract of employment, whether or not he himself employs others'. There is no proposal to amend this definition.

The proposed change 
Section 3(2) of HSWA may be amended in order to exempt self-employed persons from the general duty in respect of themselves and other persons (not being their employees), except those undertaking activities on a prescribed list. The list includes:

• Any agricultural activity
• Landscaping including the creation, maintenance and management of parks, gardens,
• Construction work
• Electricity
• Equipment and plant. Examination, maintenance and testing (as prescribed)
• Health & social care
• Waste Management

Reaction and concerns
The reaction among business organisations such as the Federation of Small Businesses, the British Chamber of Commerce and the Institute of Directors has been positive, with a general feeling that it will enable small, self-run businesses to thrive without the additional burden of health and safety legislation.

Safety bodies such as the Institution of Occupational Safety and Health, the Trades Union Congress and Royal Society for the Prevention of Accidents greeted the proposal with significantly less enthusiasm, believing that it could lead to a reduction in standards and a possible increase in injuries and work related ill-health and that the exemption will be difficult to apply correctly.

There are also other concerns as to how certain organisations such as insurance companies and contractor approval schemes will respond to the change. Furthermore many companies may simply choose not to engage self-employed persons to carry out work on either their behalf or on their premises due to the belief that these persons could not be prosecuted and therefore they could find themselves becoming liable.

What next?
The HSE will assess the costs and benefits of the proposed changes as set out in the impact assessment in the consultation document, and will then decide on how best to take the proposals forward, based on the consultation responses.

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What types of limited company are there?

When most people refer to a ‘company’, they usually mean a private limited company which has shareholders. However, there are several other types of company which all serve a different purpose.

Private Company, Limited by Shares

The vast majority of companies in UK are private companies, limited by shares. A limited company has ‘share capital’, which is owned by its shareholders. The liability of each shareholders is limited to any unpaid amount owing on their shares. Since the implementation of the Companies Act 2006, you can be the sole director of a limited company, and the office of company secretary is an optional one.

Private Company, Limited by Guarantee

Private companies, limited by guarantee, on the other hand, have members who act as guarantors, rather than shareholders. The only liability members have is the amount they guaranteed to the company in the event that it was wound up. This type of structure is commonly used by charities, voluntary groups,  and other non-profit organisations.

Members of this type of company benefit from limited liability – in most cases liability is limited to a mere £1.

One person can set up this type of company, and as with the most commonly formed company type, the office of company secretary is an optional post.

Public Limited Companies

Public Limited Companies (PLCs) are larger organisations. Unlike the other types of limited company, they may offer their shares to members of the public, and be listed on the stock exchange. A PLC must have two directors or more, and the company secretary must be qualified.

In many cases, standard limited companies are converted into PLCs at a later date, when the business need arises.

PLCs are subject to much more rigorous accounting scrutiny than their smaller counterparts.

Private Unlimited Company

A Private Unlimited Company is the final type of company, and not commonly used. These entities may or may not have a share capital, and there is no limited to the liability of their members.

Other types of Business Structure

Alongside the incorporation route, the majority of small business people operate as sole traders, or set up partnerships if they want to carry on a trade with other people.

These types of structure are simple to set up, and don’t have the same levels of administration and accountability as limited companies, however sole traders are liable for any debts their businesses incur.

The Limited Liability Partnership (LLP) route is often used by professional businesses such as law firms, where members want the combine the benefits of self employment with the protection that incorporation affords.

To be sure that you select the right type of business structure for you, we would always recommend talking to an accountant first.

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An entrepreneur's essential guide to keeping the cash flowing

Managing your business’ cash resources and ensuring you have enough to meet your needs is absolutely critical. Clive Lewis FCA, head of enterprise at ICAEW, offers his advice on the importance of managing your cashflow.

ICAEW is a supporter of BusinessZone's small business competition The Pitch 2014. 

The SME Finance Monitor, a quarterly survey of 5,000 smaller businesses, reveals that 64% of businesses have not used external debt in the last five years.

Many businesspeople must wonder how they can manage without borrowing. The answer is likely to be due to good cashflow management.

Why is cashflow important?

Firstly, why is cashflow important? Isn’t profitability more important? Well, there is an old maxim that no business ever collapsed because of lack of profitability but many have gone under because they lacked cash. Having cash allows a business to operate. 

Managing your cash resources and making sure you have enough to meet your needs, (e.g. paying wages, buying supplies and meeting your personal financial requirements), is absolutely critical.  

Starting up: Things soon get complicated

Most businesses start with a small amount of cash from the proprietor. As they build up the business they leave sufficient funds to cover the bills. Problems often start when they offer credit to customers or buy on credit, or they take on an employee or sub-contractor who requires regular payment.  Suddenly cashflow, payment from customers and payment of supplies bought on credit, becomes an issue. 

Get a grip: Keep up-to-date records

It’s at this point that business people need to establish good habits. These start by making sure that the business accurately and regularly records details of trading transactions. This might be in a manual cashbook, on a computer using a spreadsheet or accounting software. 

The accounting records should allow the business to instantly find out the business bank balance as well as what monies are owed from customers and the amounts unpaid to suppliers. 

How to prepare a cashflow forecast

Whatever system is used, it should provide the basis for preparation of a cashflow forecast. You start with what bills are already owed or owing, and known commitments of weekly or monthly expenses, such as payroll, rent and leasing or hire purchase payments. 

You then build in predictions of receipts and payments from future sales, purchases, expenses and other payments over the forecast period. 

Cashflow forecasts are a key tool in the management toolkit. They can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens.  

Managing cashflow

Receipts from customers

There are some vital steps that all businesses should take to maximise receipts from customers:

For big value sales on credit, check the customer’s credit rating 

Agree the terms of payment with the customer before starting work 

Invoice as soon as the goods have reached the customer, or service rendered 

Regularly progress payment with the customer, starting after a few days 

If payment is not received within the agreed period, progress payment higher up the customer’s management and consider how quickly you stop supplies or services 

If still unpaid, use solicitors’ letters and threaten court proceedings (although would you be throwing good money after bad?) 

Payments to suppliers

Agree payments terns with suppliers at the start of trading with them and always try to stick to them 

If you think it may not be possible to pay, contact the suppliers concerned and ask to delay payment. 

Provided you consistently pay on time, and requests to defer payment are rare, they will probably agree 

Letting suppliers down will reflect in your credit rating which may come back to affect future supplies.   

Managing cashflow is in part a mirror image of the business’ investment in working capital. 

Generally, the higher the value of stock or work-in-progress, or monies owed by debtors, the greater the difficulty in keeping control of cashflow. 
So maintaining a tight grip on stocks and debtors should free up cash for use elsewhere in the business. 

Seven tips for managing cashflow

1. Know your current cash situation
You should always know how much cash the business has to draw upon and what the position will be over the next three months.

2. Regularly prepare and update cashflow forecasts
You must be able to predict the effect of a lost sale or a bad debt on the cash position. Regular updates of cash flow forecasts are vital.

3. Raise awareness about cash
Make it clear to colleagues how important it is knowing when customers are expected to pay, and go through aged debtor schedules to ensure delinquent customers are chased up. Assign actions to staff and check they happen.

4. Think about your credit rating
Paying suppliers when agreed can help improve your credit rating. Preparing monthly management accounts and sharing the information with your bank or the credit reference agencies might also help your credit scor

5. Consider factoring or invoice discounting
Factoring or invoice discounting can offer financing of up to 90% of the value of a sales invoice. This is likely to be much more than a bank will allow on an overdraft secured on your sales invoices. Invoice finance requires a disciplined approach to credit checking and only business-to-business invoices can be covered. 

6. A bank loan or overdraft
If you decide on a bank loan or overdraft, you may be asked for personal guarantees or asked for security. Be aware of the interest rate and charges to be paid as well as any covenants with the finance. 

7. Capital expenditure
If the new asset is essential to the business, think about deferring payment by hire purchase, leasing, or hiring. Also consider the tax perspective. If you have been making losses, leasing or hiring might be preferable.

If you need help with your business plan, or simply want to talk over the financial information and forecasts, a free initial discussion with an ICAEW Business Advice Service (BAS) firm is a good place to start.

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