Amid a soaring failure rate for bank loan applications, small firms are looking to alternative finance providers for growth capital. Entrepreneurs share their experiences.

The local bank was once the first port of call for a growing business seeking finance. Today, however, , according to the latest SME Finance Monitor from BDRC Continental. And recent Bank of England lending figures showed a drop of £300m in small business lending in January this year.

Against this backdrop, a raft of alternative funding providers have sprung up offering a wide range of products, from equity-backed loans to invoice finance. Here, six entrepreneurs share their experiences.

Crowdfunding is a means of raising finance for anything from new product launches to creating new start-ups. More than £1,700 is raised every hour through crowdfunding platforms in the UK.

When Geraldine Grandidier wanted to fund the international expansion of her children’s bookcase business, Tidy Books, she decided to raise the finance through Crowdcube, the first UK-based equity crowdfunding platform.  “Banks always wanted to look at security rather than looking at our track record,” she explained. “Crowdfunding is more democratic and there is a sense of mutual trust, fair valuation and partnership with our investors.”

Ms Grandidier set up her business in 2004 and the business now turns over £500,000. In February this year, she raised £105,410, over-funding her £75,000 target by almost 50pc. 114 investors now own 11pc of her company. “Having a large pool of investors also means we have a lot of committed advocates,” she said.

Invoice finance was the route chosen by G’NOSH founder Charlotte Knight when she needed to raise £50,000. Long payment terms with major retailers had created cashflow problems at her gourmet dip company: “I used MarketInvoice as a short-term, flexible bridging colution,” she said. “My challenge was bridging the gap between long payments terms versus paying my suppliers within 30 days. It’s flexible – you can turn it on and off – and there’s no admin burden, leaving me to focus on my business.”

Peer-to-peer lending, or peer-to-business lending, championed by the likes of Zopa and Funding Circle, is similar to the crowdfunding model, but uses debt rather than equity.

Eden Akhavi, managing director of bespoke data centre business LTT SME, used, a new entrant to the space, to borrow an inital loan of £30,000 and two subsequent loans of £100,000 and £150,000.  “We had the opportunity to buy another business but we didn’t have the cash in hand,” said Mr Akhavi. “Traditionally, I’ve always contacted venture capital houses for funding but that comes at a cost: you end up giving up a chunk of the business.”

Pension-backed lending is a way for business owners to unlock the value of their pension to grow their businesses. The industry launched off the back of a quirk in pension legislation, which allows you to invest your pension into intangible assets.

Barnsley-based Oceans ESU helps clean polluted water using an innovative reed bed product. Founded in 1992 by reed bed expert Lucian Gill, the business flourished until 2010 when the war between North and South Sudan forced Oceans to remove its whole team from the country because of safety concerns.

“We struggled to get bank finance and decided to use penion-led funding because of the flexibility and independence,” said Mr Gill. “It is at the discretion of the directors how it is used, and can be kept as security without the annual renewal criteria or fees that the banks look for.”  Oceans raised an undisclosed sum through Clifton Asset Management. “We grew our pensions and have the ability to take further finance in the future from the pension fund if required.” Said Mr Gill.

Venture Capital Trusts (VCTs) are a way of raising cash to fund companies from private individuals in a tax-efficient way. Puma Investments has raised more than £130m through nine VCTs over the last nine years. Its loans are made on an asset-backed basis, so the firm only lends to companies with property, plant, stock or intangible assets like ongoing fixed contracts.

Simon Bunn and Kris Gumbrell, founders of the Brewhouse & Kitchen, borrowed £3m to support the roll-out of their pub chain. “Start-ups are not attractive investments for the banks,” said Mr Gumbrell. “VCTs provided the funding we need, when we needed it.” Using VCT and the government’s Enterprise Investment Scheme, which offers a range of tax relief on investments, Brewhouse & Kitchen is planning to open four pubs a year to a 12-strong estate.

Private equity isn’t just for large corporates. Medium-sized firms can also access funding from mid-market specialists. In 2010, courier service CitySprint secured £30m from Dunedin to fund a management buy-out (MBO). Chief executive Patrick Gallagher said: “We were attracted to the private equity model as we knew that we’d get an experienced private equity manager on our board. They would provide capital, experience, insight and access to a network of experienced non-executive advisors.”

In the four years since CitySprint secured the investment, the company has doubled its turnover to £113m and completed 13 acquisitions.

Rebecca Burn Callander

By Rebecca Burn-Callander, Enterprise Editor

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