Starts Ups Need To Know Sources of Cash

Stephen Grant

Published by
Stephen Grant

5th March 2019

The pluses and minuses of alternative sources of finance for start-up/ young businesses such as crowdfunding, peer-to-peer finance, and of more traditional forms such as invoice-discounting.

Many start-ups and young businesses are continuing to find it difficult to take out loans and secure other types of borrowing through UK banks, with banks remaining in a risk-averse mind set when it comes to lending to unproven ventures. Banks will often cite lack of experience, management or customer base as a reason to decline borrowing. Others will simply refuse with no reason given.

Given the current economic and political climate, where uncertainty is widespread, many start-up and young businesses need to seek alternative sources of finance.

Peer to Peer Lending
Many will consider peer-to-peer lending (aka P2P lending) or the business equivalent peer-to-business (aka P2B lending) which has steadily grown in popularity in recent years. In this form of lending, investors’ money is matched, via an online platform, to a loan for a person or a business. Lenders will normally ask for information about your business e.g. copies of your business plan and accounts.

P2B lending can provide start-ups and young businesses with a quick and relatively cheap form of borrowing which can be particularly useful for funds to allow a business to scale up.

P2B lending might not be suitable for businesses that do not already have customers and cash flow given the need to service the debt and you may be required to provide some form of security for the loan e.g. property, assets.

There are a plethora of peer-to-peer/business lending providers available online and businesses should look for a provider that suits their requirements with, Saving Stream and Rate Setter being among the current popular choices.

Business Grants and Loans
Given the employment opportunities and economic growth that young businesses inject into the marketplace and economy respectively, the Government are often keen to assist by providing some financial backing. The availability of business grants and loans can vary year on year but typically there should be something available for a budding start up.

As some of these grants and loans are backed by public funds you can expect low interest rates and fees. However, they are often associated with a relatively time consuming and convoluted process which may detract from work on developing your business.

Also, keep an eye out for competitions which are often accompanied with no-strings attached money. Prizes can range from the £1,000 - £100,000 depending on the industry and are often a chance for business owners to make connections in the industry and to gain free public exposure.

Invoice Financing
A more traditional form of generating income but one which is often disregarded is invoice financing. There are two main forms of invoice financing: (1) invoice factoring; and (2) invoice discounting. Both relate to the practice of selling an invoice which your business has issued and receiving the money immediately but for a price that’s less than the amount owed.

Invoice financing is typically used to help improve a company's working capital and cash flow position by removing the delay between invoicing for goods/services and receiving the payment. Understanding cash flow is an essential part of running your aspiring business and without positive cash flow many successful businesses can quickly suffer from irrecoverable problems.

With invoice factoring the factor takes control of the invoice meaning you are in less control of how the customer is managed and treated.

Invoice discounting is a variation on factoring where the lender still advances money on a business’ invoice but the business itself still collects the debt. Invoice discounting generally attracts a higher advance than factoring. However, you incur fees whilst retaining the responsibility and work for debt collection.

With invoice financing you are usually charged a fixed monthly fee based on a percentage of turnover and often still need to pay the monthly charge if you stop using the facility.