Smaller companies can sometimes have a struggle raising funds. Your bank is usually the cheapest way, but banks are usually the first to turn you down. And that is when entrepreneurs can easily find themselves in a confusing maze of alternative finance, or excesses on their accounts.
Access to finance is a problem that small to medium sized companies (SMEs) often face, according to the Finance Monitor that the CBS has recently published. Because banks have tightened their criteria for granting bank credit since the credit crisis, SMEs often have to search for alternative means.
In a Nutshell
Smaller companies often have to turn to alternative forms of finance because their bank won’t extend their credit.
Entrepreneurs often lose track when searching through the hundreds of companies offering alternative forms of finance.
Newcomers to the market are informal investors and crowd funding, although the latter only offers a small part of your financing requirements.
A third of entrepreneurs in the small to medium sized company sector try to raise finance away from their usual bank, yet only 5% manage to find it, Ronald Kleverlaan, Chairman of the MKB Financiering Foundation recently stated in an article in the FD. ‘There is a gigantic gap in this sector. Companies don’t know how to find the way. Even the advisors in this sector don’t have enough knowledge about it.’
Choosing from the couple of hundreds of offerors of factoring, leasing and other forms of alternative finance is not easy either. A vanguard of ten financiers, including Spotcap and Funding Circle, set up a foundation last October to separate the wheat from the chaff. Next month the foundation will be introducing a seal of approval for alternative money providers.
As a rule, borrowing from the bank is the cheapest way to raise funds, but since 2008 banks have cut off funding for the SME sector. In 2013, 800,000 SMEs had a bank loan and last year this number had reduced by 300,000. During this period, the sum of all outstanding bank loans to entrepreneurs dropped by €18 billion.
SME entrepreneurs try to raise between €10 to €15 billion in new capital every year and at least 10% of this money is from alternative financing. ‘We expect this trend to grow’, according to Kleverlaan in the article in the FD. ‘Nowadays, companies go straight to alternative means of finance or they combine this with bank lending.’
According to an article in the FD, Edo Knoll from Capital Union in Rotterdam advises SMEs with a turnover of up to €30 M about alternative financing. ‘They are usually people who can’t or don’t want to work with a bank. Bank rules are getting stricter and stricter. They want all kinds of security, like property. If you don’t have that, you have to come up with something else.’
That could be factoring, where another company takes a fee for advancing the amounts due from a company’s invoices, so that the entrepreneur doesn’t have to wait for his / her money. Another alternative is to find rich individuals who are wanting to actively invest. ‘This is a growing group of people’, says Knoll in the FD article. ‘They want to tell their friends that they have made a nice investment. There has to be a good click, or you are only taking on trouble. They often want to coach you.’
Fintech companies are more expensive but they often don’t worry about taking any kind of security, the advisor adds. For them it is more important that money is coming in, onto their bank account. Another fast-growing concept is crowdfunding, where the general public can invest in companies. Also, an entrepreneur could try to attract a further shareholder, such as an investment company. This is usually when a company needs to raise a larger amount of money.
These new sources of finance have found niches in the market because the banks are taking on less risk, according to Rob Wolthuis, the Secretary of MKB Nederland. The ‘Big Three’ banks used to finance practically all Dutch SMEs, but they now turn down starters, companies that were growing very quickly and innovative companies. Even regular SMEs are often rejected these days. ‘This never fails to surprise us. The profitability of these companies has vastly improved.’
Factoring is a great way of improving the way your company is financed. It’s not just a question of bringing a bag full of money into the business, it’s much more than that. Would you like to know more? We would be very happy to talk to you about this new, very effective and increasingly popular form of financing. Take a look at our website or call us on +31 20 770 35 25.