Probably the definitive manual for any business looking for funding in the UK is a new Business Finance Guide, jointly launched by the Institute of Chartered Accounts in England and Wales (ICAEW) and the British Business Bank, and promoted by the Department of Business, Innovation and Skills and 18 major finance and business organisations.
The guide is designed for use by just about any British enterprise – from start-ups, through the many stages of financial growth to ultimate listing on the stock exchange. Whatever stage of growth the company may currently achieve, the guide aims to provide a comprehensive resource for finding the necessary business investment or lending to progress to the next stage.
According to the Business Secretary Vince Cable, many businesses are relying on too narrow a band of potential sources of business finance, with as many as two-thirds of smaller enterprises approaching just one provider. The guide aims to open up a whole new range of options to such businesses.
The Business Finance Guide: review
Following a foreword by the head of the British Business Bank, Keith Morgan, the guide plunges straight into the business at hand by reminding companies of the critical role played by business planning and by the management of cash in any business.
Given that very many potential providers of business finance are unlikely to progress beyond first base without sight of a fairly detailed business plan from any applicant, the emphasis on what such a plan needs to incorporate may be understandable.
However, the guide fails to mention one important exception to this general rule. A business plan – let alone a plan as detailed as the one described in this manual – is not a requirement typically made by online lenders of relatively small (say, £2,000 to £50,000), relatively short-term (say one to 24 months) business loans. These types of business loans are explained in more detail by Everline here.
The guide’s emphasis on the management of cash flow, however, seems especially relevant, especially for small businesses taking on the commitment of a repayable loan or other investment. Lenders or investors may well be expected to take a very keen interest in the way in which a company manages its cash flow.
The guide continues with a flow diagram depicting the journey – or perpetual series of journeys – made by any business enterprise. It makes the point that debt or equity investments are likely to be involved on a more or less continuous basis as the company develops.
Having identified the need for debt or equity investment, the central part of the guide is designed to set out for businesses the various options facing them at various stages of the business life cycle.
Quite reasonably, these options are group under the twin headings of equity finance and debt finance.
Under the former equity heading are such sources of finance as:
- seed funding;
- angel investment;
- equity or investment crowdfunding;
- venture capital;
- corporate venture capital; and
- an initial public offering (IPO), leading to public listing on the stock exchange.
Each of these potential sources of equity investment is then considered in some detail.
Under the heading of debt finance, the following sources of funding are identified:
- start-up borrowing;
- loans and peer to peer lending;
- overdrafts;
- bonds;
- asset based finance – whether invoice factoring or asset based lending;
- hire purchase and leasing;
- export finance – for example, the issue of export guarantees and letters of credit;
- trade finance – funding for the purchase of specific goods and shipments; and
- mezzanine finance – borrowing that may be converted into equity in the event of the borrower defaulting on loan repayments.
Once again, each of these potential sources of debt funding or borrowing is considered in detail.
Beyond this central part of the guide there is relatively little more for the small business to learn, other than the recommendation to seek the appropriate advice when growing a business (whether through sources provided by the government, through business mentoring, business coaching or through the Business Finance Advice scheme set up at the beginning of July 2014 by the ICAEW.
The guide concludes with a list of those organisations from which small businesses may be able to find support, together with the very briefest description of the role and activities of the British Business Bank.
About the author: Jason Holland is a freelance journalist who writes about business and personal finance.
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