RAISING FINANCE FOR SME's - 13.12.11
Small and medium sized enterprises (SMEs) are the U.K.’s key source of economic growth and employment.  A report published by the City of London Corporation in March 2010 estimated that SMEs account for almost 60% of our total private sector employment and 50% of private sector turnover. However, in the wake of the credit crunch and subsequent financial crisis, many SMEs are still struggling to find bank finance.
So, what other funding options are there?

1. Private Equity or Venture Capital Finance - VCs typically invest in return for equity in the form of shares with a minimum investment at around £2M and they require a large earning potential, a high return on their investment within a specific relatively short time frame and for these reasons private equity is not normally suitable for smaller or start up SMEs. In addition, most business owners are deterred from seeking equity finance because they do not want to relinquish control and a recent government green paper stated that only 2% of SMEs have recently accessed equity finance.

2. Business Angels - Business angels (or dragons) are wealthy individuals who invest in high growth businesses in return for equity.  Some angels invest individually, others as part of a network club or syndicate and an important benefit is that in addition to providing finance, angels can bring business experience and access to contacts.
Angels require businesses to have a proper strategy and demonstrate sustainable growth.  The British Business Angels Association states that a typical angel network may receive about 800 enquiries a year but only around 2% will successfully gain funding.

3.Government Assistance - The government intends to continue the Enterprise Capital Funds programme for the next four years providing investment in early stage innovative SMEs with a high potential for growth. It invests public money alongside private equity investment with the aim of attracting further funds from private investors. The government also plans to continue the Enterprise Finance Guarantee scheme which helps SMEs with insufficient collateral or financial history to access commercial debt finance by providing lenders with a guarantee from the government for 75% of their exposure. However, this programme has been criticised by SMEs who have discovered that banks may still require extensive personal security.

4. Asset Based Finance - Asset based finance generally takes the form of invoice discounting or invoice factoring which allows the borrower to draw down a percentage of their outstanding sales invoices in advance of such invoices being paid in return for a fee and interest payable to the lender.  It also allows the borrower to retain ownership of the debts due under the sales invoices and responsibility for credit control.
Invoice factoring on the other hand results in ownership of debts being transferred to the lender in exchange for immediate finance, again for a fee. For many SMEs, debtor balances are the largest asset on the balance sheet often representing two or three months worth of sales.  Invoice discounting or factoring is therefore becoming an increasingly common form of finance.

5. Stock Markets - Growth markets such as AIM or PLUS can help some larger SMEs to raise finance.

6. More Bank Finance - The banks are keen to impress that they do have funds to lend but do not wish to return to the arguably irresponsible lending of the last decade and are happy to lend to firms where their business plan is robust and businesses need to show that they have enough coming in to repay any borrowing.