Finance · 14 October 2015

Is it really that hard for small businesses to access finance?

While many businesses struggle to access finance, the growth of alternative finance has been accompanied by a wealth of information on what's out there
While many businesses struggle to access finance, the growth of alternative finance has been accompanied by a wealth of information on what’s out there

Access to finance is frequently pointed to as a stumbling block for smaller businesses and their growth ambitions, but is it really as significant an issue as is often made out?

KPMG’s Bivek Sharma believes the answer is a definitive yes. “If you think about the journey of a business from its starting point, and the amount of effort, time and money you’ll spend to grow – it is considerable,” he said. From a firm’s conception in its early days, “you might be talking personal funds, or contributions from other people like friends and family, then moving onto the more formal routes of funding and there’s a huge amount of groundwork involved”.

While Sharma feels it’s “not ideal” that access to finance is so tricky, and too many micro firms run into trouble here, it does “make sense that is tough”. If you’re asking someone to help finance your business, they’ll want to know exactly how you’ll use the money and need to be convinced that you will be able to pay them back.

Additionally, while access to finance can be a rocky path to tread, Sharma notes there are a few obvious steps you can take to make sure it’s as free from difficulties and obstacles as possible. “Fundamentally being aware and preparing properly for each stage is critical,” he said.

Funding isn’t always as obvious as businesses think it is. Sharma pointed to the example of an early-stage firm seeking a talented individual to join the team – without many offerings to woo them with. You may opt for share options as an alternative to a higher salary in the early days – “in a way it’s a twist on funding”. It’s sensible, therefore, to spend time looking into options, and Sharma feels the growth of alternative finance has been accompanied by a wealth of information on what’s out there – in itself providing invaluable insight into how others have successfully found funding, and how to replicate their success.

“Look at the Scottish brewery BrewDog for example – it has equity crowdfunded a few times now, and it’s now experimenting with crowdfunded bonds. With successes like that, small firms can look at them and see how it’s done,” he added.

Startup guides are widely available online – KPMG for example provides a useful one – delving into loans, equity, and crowdfunding, helping business owners understand what these all involve and what you need for them. They set out the initial background knowledge, but as the owner of a firm it’s crucial for you to do groundwork on who to approach and why.

Sharma feels that despite the increasing availability of advice and options accessible online, many early-stage firms still opt for directly approaching a bank as the first port of call, due to a lack of knowledge. “A lot of the time, it’s really not the right answer for businesses at that stage, particularly without the trading history which banks will want,” he pointed out. But it’s still the obvious go-to choice, and if people haven’t scouted out other options, they are likely to opt for banks straight away.

He also warned of getting caught up in the “equity crowdfunding bandwagon” – as it’s easy to see others doing well and feel inspired by their success, without properly assessing if the route is right for you. “You might think ‘I’ve got a great idea and a great brand’, but you can get swept up and forget you have to do the application process and a hell of a lot of work for three to six months to even have a chance of success,” he added.

As well as compiling business plans and forecasts for investors, Sharma said businesses embarking on crowdfunding need to “be available 24/7 to answer people’s questions, to manage social media and establish and build up connections”. While you may make considerable progress in reaching a crowdfunding goal with friends and family chipping in, there will still be a significant part made up from those you don’t know. Targeting these people and securing their belief in the business is often an overlooked part of the crowdfunding process.

New businesses unaware of all the options out there need to be thorough in their research – Sharma believes the increase of alternatives is improving the landscape for smaller firms, but it’s still one of the trickiest tasks and you need to think long and hard about which route to funding will work best at which stage in your company’s development.

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Bivek Sharma has been a partner with KPMG for over ten years, specialising in accounting, tax and software. He started the Small Business Accounting division over two years ago with a goal to transform accounting services for small businesses. The team works with a huge variety of industry sectors and companies including coffee shops, technology companies, manufacturers, pubs, restaurants and retailers.