Tax & admin 19 August 2015

How widening lending options are opening up new opportunities for the UK’s small firms

Having cash available is critical to new businesses
Having cash available is critical to new businesses

The head of business development at Tungsten Network explores the increasing lending options being introduced for small businesses and why options such as e-invoicing can make all the difference in the difficult early stages.

In an important milestone for Britain’s small businesses, figures are showing growth and startup rates return to levels seen prior to the recession in 2008.

The return to form for these businesses is significant for the UK economy at a time when politicians are struggling to solve the country’s poor record on productivity. Firms defined as having fewer than 250 employees account for 60 per cent of private sector employment and showed far greater productivity than firms in the wider economy during the final three months of last year.

Growing confidence on the high street as shoppers part with more cash, and a general improvement in the business environment have also helped boost morale among smaller firms.

It has been a long, hard road for them since the recession, but it’s encouraging to see borrowing rates are increasing with banks for the first time in years, increasing their small business lending.

The flagship Funding for Lending scheme has been influential in allocating funds as accessible and affordable loans for such businesses that form the backbone of the British economy.

Net lending – the difference between new loans and companies paying off debt – by banks in the Funding for Lending Scheme grew by £635m in the first three months of the year. This represented a significant landmark for the Bank of England after its scheme was refocused to target business lending from the start of 2014.

Firms are clearly ready to invest but it’s a sad fact that a great deal of the additional bank funding will not have reached many of the 5.2m small businesses currently trading in the UK.

For many of these firms, bank loans just aren’t an option. The requirements that must be met before capital is offered can simply be too much.

A cake-making business trading for only a year, as an example, has a perishable, seasonable product that relies on high levels of sales and marketing investment. There is nothing concrete that a bank can secure against.

Small business activity can vary wildly month to month, and there can be significant cash flow bumps along the way, all of which make committing to repayments problematic. For many firms the banks’ terms are just not flexible enough to warrant the commitment of a standard business loan.

Take our cake maker, for example. The costs of labour and ingredients, not to mention the often long delay between handing over the goods and getting paid, means there might be little cash left over at the end of a busy month, but plenty inbound on the books.

To fill this funding gap, many businesses are now looking to alternative forms of finance that offer more flexible solutions. Crowdsourcing and peer-to-peer lending have hit the headlines recently and can be a great option for micro businesses with bright ideas, but not so good for the more general day to day needs of a business.

Another option is using the invoice book as an asset against which to raise finance. Many micro firms will know the agony of waiting to be paid for a job that was done weeks, or even months, ago.

The new generation of technology means that people no longer have to endure the wait, but can access, at the touch of a button, the cash they need to keep their business running smoothly. Tungsten is utilising this alternative finance technology, with thousands of suppliers now eligible to access early payments on invoices filed through a simple online e-invoicing system.

The phrase “cash is king” is often used, and for good reason. No matter how large the order for cupcakes tomorrow, if there is no money to buy ingredients or pay people to make them today, any baker would struggle.

You don’t have to be a magician to run a business. Sweet success comes from careful planning, a passionate commitment to your trade, and enough available cash to keep your business moving.

Image: Shutterstock

Henning Holter is head of business development at e-invoicing company Tungsten Network.

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