Don't Bank on it! Tips on financing business growth

Established businesses that are expanding rapidly face challenges from all sides. They may be winning large contracts with slow-paying major customers, recruiting at a fast pace, experiencing increased competition and market pressures, they may need to invest in production, marketing and development almost simultaneously and the management team may also be looking at new ventures and territories.

If this sounds like you, then you will be familiar with the sensation of having to keep all the plates spinning, while also professionalising your business – perhaps taking on greater financial or managerial clout. You might be recruiting at director-level, while also cementing existing relationships with everyone from new recruits to your oldest customers.

As a thriving, established business, you have already established your credentials but to maintain growth, the business requires more working capital investment.

Most growing mid-sized businesses with revenue of $10-30 million could really do with another $1 million to fund growth. But where do you find it?

Raising equity from business angels does not make sense for most established businesses. Few owners are happy to give up control of their business. Similarly, few businesses fit the criteria of business angels who look for unique companies with strong growth potential and solid prospects for a sale of the business in the medium term.

At the other end of the spectrum is your bank. Unfortunately, banks require real estate security so it will be impossible to obtain meaningful working capital finance from a bank without pledging a substantial amount of real estate. Business owners waste a lot of valuable time looking for an overdraft from their bank.

Filling the void, peer-to-peer business loans can provide an alternative source of finance. These sources of funding are thriving but are typically only able to provide up to $150k on an unsecured basis. The costs are quite high and the need to repay monthly over a 6 month term makes even less sense for growing businesses.

However, there is another key option: your existing sales ledger can also provide a valuable source of cashflow with larger facility sizes ($1m+) than available from unsecured lenders.

Historically, the only option was factoring which involves onerous contracts and the consent of your customers. An ancient model, literally as it was invented around 4,000 years ago in Mesopotamia, it doesn't work for most businesses.

Now there is a much better way - confidential invoice trading. Online invoice trading platforms connect businesses with a pool of investors who will advance funds against existing valid invoices. Instead of waiting out long payment periods, businesses trade their invoices and receive a percentage of their value – around 80% - with a minimal waiting time. All without involving your customers.

Online or alternative invoice finance improves on the traditional approach to invoice finance and factoring considerably.

It is possible to trade a single invoice, rather than surrendering a complete sales ledger to a provider. The technology platform keeps costs low, and decisions on creditworthiness are rapid. Generally, platforms approve businesses within a day, provided they can produce bank statements and accounts. Once invoices are validated funds can be made available straightaway. Costs come in at around one to three per cent, but over time this kind of finance becomes more cost-effective, with discounts for subsequent invoices.

Invoice finance is a useful means of improving cash flow and unlocking access to working capital. It is also particularly helpful for businesses considering export markets where payment cycles can be unpredictable particularly in the short term.

Check out the alternatives to banks. Speak to a finance broker or your accountant or enquire directly with providers that seem to fit your needs.