Sourcing A Uk Business Development Loan
Finding a business development loan in the UK can be difficult
, particularly in the present climate. This article looks at the sources of business development loans and how to access this type of funding.
Bank Support
The main starting point for most businesses when thinking about borrowing is to approach their bankers.
Banks will normally be seeking some form of security to back up a loan of any size to an owner managed business or SME. If sufficient security can be provided and the bank is satisfied with the proposed plan and projections then this sort of funding should still be available from most banks.
If there is not sufficient security available but the project would otherwise fit the bank's criteria, then in theory use of the Enterprise Finance Guarantee scheme may be appropriate. Under this, and the previous Small Firms Loan Guarantee scheme, the Government provides the lender with a partial guarantee for the facility in place of their normal security. Unfortunately however, lenders generally seem reluctant to use these schemes which some perceive as bureaucratic. More critically perhaps for a lending decision, the guarantee provided is only a partial one so the lender remains at risk for part of the loan.
Publicly Supported Funding
Publicly funded support can come in the form of soft loans at favourable interest rates or repayment terms, equity investment channelled through development agencies or outright grant funding which has the great advantage of not needing to be paid back if you comply with the conditions attached to it.
Most public funding of this type is targeted at business development projects of one sort or another. Sums awarded tend therefore to be linked to projects such as training, new product development, or investment in plant and equipment, particularly where this will help reduce your carbon footprint.
Whilst the sums that can be raised are substantial, and can involve both support for purchase of plant and equipment, and wage subsidises in respect of jobs created, secured or saved, obtaining any form of public funding can be a time consuming and frustrating process starting with the basic question of what you may be entitled to apply for.
There are literally thousands of different schemes across the country administered by everything from local authorities and Regional Development Agencies through to non-government organisations such as the Prince's Trust; and quangos such as the Carbon Trust or NESTA, the National Endowment for Science, Technology and the Arts.
Each funder has its own objectives and application process. So a number of specialist consultancies help businesses to identify the schemes they may be eligible for and manage the application process so as to give the best chance of raising funding.
This type of funding also has its own particular characteristics which you need to be aware of. Little funding is awarded retrospectively so you need to complete the process and secure your award before you start your project. Very few schemes will provide 100% of the funding required so you will also still need to have raised the balance elsewhere. Worse still, as the claims payment process is usually a retrospective one, you will usually have to fund the full cost of the project from your existing resources, before being able to seek reimbursement of the funded element.
Cash Flow Loans
Cash flow loans where a lender provides a facility solely on the strength of the forecast cash flows are rare in the SME and mid-market sectors, where as discussed above, other than at very small levels, banks will usually want loans to be supported by assets as security.
Factors and invoice discounters were sometimes, pre-credit crunch, offering some cash flow facilities in relation as part of funding for buy outs and other transactions in the shape of loans repayable over two or three years. While this is less common, they will still often consider providing temporary facilities by way of an 'over advance' against the ledger.
The practice of 'block discounting' which involves providing an advance against a future stream of contractual cash flows is now restricted to a very small number of funders, although there is a strong source of finance for this type of situation at levels of 10m and over.
A small number of VC firms are also prepared to provide high interest loans on a cash flow basis, either for business development or to deal with distressed situations. This approach provides an alternative to business angel equity whereby, despite the high rates charged for the money involved, they avoid dilution of the owners' equity. This is a very specialised market where there are only a limited number of deals done so you will need to speak to your professional advisors if you think this may be of relevance to your position.
by: Mark Blayney
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