Despite business investment falling in 2018, the number of new businesses registered in the UK grew by 6 per cent compared to 2016. Currently 20 per cent of small businesses fail in their first year, 30 per cent in their second year, and 50 per cent are no longer around after five years in business.
And the main reason for failure? Lack of capital due to lack of investment. Accessing funding for small businesses has never been tougher and the nation’s SMEs are at risk of stalling without vital growth finance. With investment into businesses falling by 1.5 per cent from Q1 to Q3 of 2018, small businesses are having to get seriously creative about how to access critical funding and secure financial backing to survive and grow.
As a niche motorhome sale and hire company within the leisure industry we have spent a number of years learning the hard way when it comes to securing financial backing. We have become increasingly frustrated and disillusioned with the lack of support and willingness to invest from the traditional channels of high street banks. And its that frustration that has driven us to look creatively at other more innovative funding options.
These are the key steps I would consider when you are looking at funding options for your business:
When looking at raising capital for business growth, it’s important to understand the financial needs of your business and be realistic about what you can achieve. Then you can go about creating your funding pitch.
As an SME we have learnt that lenders are not interested in turnover, profits or demands but fundamentally they want to see assets on the balance sheet. So, we have spent the last year structuring our businesses to be profitable and with strong balance sheets, making us an attractive option to a lender and contender for funding. For us that has meant a restructuring of our business and the introduction of new revenue streams. Our business now has nine separate revenue streams, all focusing around delivering customers’ passion for motorhoming.
I think it’s important to understand who a possible funding partner for your business might be. Who would be interested and why? A good place to start is to look at your competitors and ask how they fund their growth. I’m always amazed at how easy it is to find out how successful businesses have become successful. You just have to ask!
Having spent some time analysing the competition and our market generally, one thing that was abundantly clear to us from looking at feedback and bookings was that there is a deep customer passion for our products and services in our niche sector. We wanted to explore the bold step of approaching our customers for finance. With a captive audience of fanatical customers who had become raving fans of our business, we determined there was something very commercially romantic about having your customers invest in your business.
We’ve been able to successfully capitalise on this approach by turning to our loyal customers for finance. The model we have created has been highly effective and has enabled us to secure up to eight times the amount any bank would lend, and at very favourable rates.
The other great benefit of implementing such creative investment is one of cash flow. We pay our customer investors 6 per cent flat rate per annum with an interest payment quarterly. The capital is repaid as a lump sum at the end of the term, usually after two years. The huge benefit to us as a business is that it’s cash flow friendly and gives us plenty of time to gear up for repayment. We also take care of the investors’ income tax on interest payments and associated HMRC paperwork.
We would wholeheartedly recommend exploring your customers as a route to investment in your business. Their vested interest becomes a great passive marketing tool for us. It’s a win-win and that’s always music to the ears of any business owner.