What are alternatives to bank funding?

But with small firms constantly hailed as the backbone of the economy and the engine for recovery and growth, how easy is it for businesses to find funding?

Insolvency practitioner Tomlinsons suggests that more than eight out of ten small business owners feel that banks have not done enough to help them in the recession.

Complaints include restriction or removal of credit facilities while finance that was available became more costly.

So what are the alternatives? The Enterprise Finance Guarantee was launched by the Government to stimulate bank lending to small businesses by guaranteeing loans of up to £1m.

Concerns remain, even though the scheme has been extended – it was due to end in March – and despite claims that nearly £700m has been lent to small businesses.

A survey by adviser Clifton Asset Management, based in Bristol, found that more than a third of business owners had not heard of the EFG and of those that had, most saw no point applying as they believed they would be refused.

Some firms might consider venture capital or private equity investment, but this typically means giving up a share of equity.

Experts warn that this option is likely to be too expensive for many small firms. The British Venture Capital Association has more information at bvca.co.uk.

Using assets held in the business is another option, but a less common way is using a pension fund. This can be done by using money from the fund to buy shares in the business, giving it a cash injection.

Alternatively the pension fund may be used to buy some of a firm’s assets. Or, the pension fund can be used to guarantee a loan.

Anthony Carty, a director of Clifton Asset Management, says for firms with the right assets and pension fund, this option might be worth considering.

He says: ‘Taking a loan against the pension is cheaper than traditional borrowing and could be an attractive option for businesses that were able to make tax-efficient pension contributions during profitable years and can now draw on these facilities to help smooth the lack of finance until the general economy improves.’

Guy Unwin, 57, and Caroline Kavanagh, 55, set up Planit Products three years ago.

The firm, in Malvern, Worcestershire, invents and makes innovative kitchenware, including their best-known product, the Toastabag, for making toasted sandwiches in a conventional toaster.

Though the business, which supplies discount shops and retailers, turns over £3.5m a year, Guy and Caroline could not find bank finance two years ago.

Guy says: ‘The bank was helpful but because we didn’t have assets such as commercial property, it was not prepared to lend. We contacted Clifton Asset Management who suggested using the assets we did have through our pension and the brand.’

Guy and Caroline raised £50,000 against their pension.

Guy says: ‘We now have a product manager, 12 people working for us and we are moving to a larger factory. For us, raising money in this way was the best alternative to bank finance and it has really helped us to grow.’

However, experts warn that small business owners should explore all options before deciding to use pension funds.

An independent financial adviser can help to cover all options. Unbiased.org.uk has details of IFAs.

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