Looking for finance? Don’t always bank on it
Bank debt isn’t the only game in town for businesses. Here are some alternatives
Put the terms and conditions down on paper, make it official and make sure to meet your obligations. Photograph: iStock
Just because it’s old-fashioned doesn’t mean savings are superannuated. Very many of the businesses that made it through the last recession will admit that it was having reserves that saved them. Building them up is an essential part of any business’s strategy and simply good corporate governance. If you’re starting out in business, savings will go a long way. Whatever size or stage your business is at, the cheapest money you’ll ever get is your own.
Friends and family
Often referred to as part of the 3Fs – friends, families and fools – borrowing from friends and family, or tapping them as investors, is very common. Forgetting fools, because that’s just wrong, who better to apply to for a loan than people who already think you are great? Loans are better than investments, however, because they are clean-cut and everyone understands their obligations. Put the terms and conditions down on paper, make it official and make sure to meet your obligations. It’s both a good business discipline and the only way to ensure you survive family get-togethers thereafter.
Once you’re up, running and growing, you can ease your cash flow constraints with debtor finance. With invoice finance, the most common, a specialist provider pays up to 90 per cent of each outstanding invoice up front, with the balance paid when your customer pays, for a fee. It helps bridge the gap between providing goods and services and getting paid for them, a tricky manoeuvre at the best of times but particularly where margins are tight. If you’re growing, it helps protect against overtrading and even if you’re not, it might help you secure early payment discounts from your own suppliers.
Banks offer it as a service but so too do a number of specialist providers such as Bibby Financial, Close Commercial Finance, Capitalflow and Grenke. Trade finance firm Convertibill was set up in 2011 because it could see how inadequate bank lending was impacting business. It recently appointed Harry Parkinson as its managing director, well-known in the industry here, having previously headed up Capitalflow and Close Bros. Convertibill provides order, contract, supplier and debtor finance, as well as asset and operational lease finance. It also promises quick decisions, crucial for businesses keen to avoid the opportunity cost, not to mind the indignity, of the dreaded ‘slow no’.
Hard to believe it’s just six years since Peter O’Mahony, the entrepreneur behind Dublin’s Laughter Lounge comedy club, launched Linked Finance. He has since helped thousands of Irish businesses to avoid not so much laughing all the way to the bank as crying all the way home. Back then, when all the talk was about “green shoots”, it was peer-to-peer lending that helped very many SMEs return to growth. Since then, the sector has grown to include a number of players including Grid Finance, Flender and Spark – an equity crowdfunder as opposed to a peer-to-peer lender. The movement has even sparked Property Bridges, a peer-to-peer platform for property lenders.
All have their own terms, conditions and interest rates, which largely depend on the appetite among the peers for your debt. Though it remains a drop in the ocean compared to bank lending, peer lending numbers are growing. Flender offers loans of between €15,000 and €250,000, for terms of up to three years, at competitive rates. A recent loan on its books for €27,000, which it rated A+, was priced at an interest rate of 7.5 per cent over three years. A D-rated loan for €47,000 secured an interest rate of 12.9 per cent. Flender has lent more than €14 million to date and recently secured a new lending line for itself of €75 million.
Again, these fall under investors rather than lenders, but a business angel can offer an attractive alternative to bank debt, particularly for newer companies. Typically, angel investors are wealthy people who provide investment at an earlier stage than venture capital funds would.
Not only do you avoid monthly repayments of bank debt, but you get money with benefits – so-called smart money. This is because professional business angels, as opposed to informal ones, typically bring with them business experience and contacts too.
The best way to find a good one is to get in touch with HBAN, the Halo Business Angel Network, an all-island umbrella group responsible for the development of business-angel syndicates. HBAN is the largest business angel network in Ireland, with 10 different angel groups and syndicates – a host of angels, in other words.
It’s particularly keen on start-ups. In the past five years, more than 210 start-ups received funding from its angel investors, to a total of €138 million. Last year, HBAN business angels invested €9.3 million into 44 companies. That investment leveraged a further €27.5 million of additional public and private funds from organisations such as Enterprise Ireland, venture capital companies and founders.
Ireland’s preponderance of family-owned businesses have come to see private equity as a good option for a number of situations, from fuelling growth to consolidating the shareholder register to enabling the older generation – or the owner – to cash in a few chips.
Some of the country’s best-known businesses, including chocolate company Lily O’Brien’s and pharmacy chain Sam McCauley, have secured it. For anyone interested in following in their path, there are a number of private equity players in the market now, including the Carlyle Cardinal Ireland, MML Growth Capital, BDO, Causeway Capital and Renatus Capital. Between them, they have millions of euros to invest in the right business. Of course, as with any equity investment, you’re going to have to give up a share of your pie, a traditional bugbear for Irish businesses, but the ultimate aim is to ensure everyone’s slice gets bigger.
You might lose an element of control too, but if you chose the right one and everyone is pulling in the same direction, that should work out just fine. Just be careful to do your due diligence on them, as much as they will do it on you, and make a point of talking to the management of companies the fund has invested in previously. If at all possible, talk to candidates you find yourself rather than ones they suggest, who may, perish the thought, have been primed.
In the rush to secure finance or funding, don’t forget just how much assistance is available to indigenous Irish businesses from the country’s 31 Local Enterprise Offices, for small businesses, and Enterprise Ireland, for larger ones and those it deems High Potential Start-Ups (HPSUs). These include financial supports for everything from taking a business online to introducing lean efficiencies. EI’s Development Capital Scheme provides funding for mid-sized, export-oriented businesses, particularly manufacturing and technology companies in sectors including engineering, food, life sciences, services and electronics. It provides supports to help businesses develop new markets, new products and new processes. Right now, there is help for businesses impacted by the prospect of Brexit too.
Enterprise Ireland supports a good deal of VC activity in Ireland too. A total of €685 million is under management in EI-supported Seed and Venture Capital Scheme funds. These include the AIB Seed Capital and Start-up Accelerator funds, Atlantic Bridge, Bank of Ireland’s Early Stage Equity Fund, Kernel Capital Partners and Start up & Emerging Equities funds. Delta Partners, Fountain Healthcare Partners and Seroba Kernel Life Sciences are also included, as are the Frontline Ventures Fund and SOS Ventures Ireland Fund.
Finally, keep an eye on developments in the fast-moving financial technology sector. While to date much has related to payments, we have already seen how digital disruptors such as Revolut and N26 are succeeding. Increasing moves into credit, lending and indeed business lending are likely too. In fact, you can take that to the bank.