Is there any hope for small businesses?

17 May 2012

Small business owners desperately seeking funding might want to consider asking their mates before heading for a meeting with a bank manager. They could have more chance of raising the money they need this way, as bank-lending criteria continue to exclude many entrepreneurs.

Last year, one of the key government-led drives to get the economy moving again was Project Merlin - an initiative encouraging the big high street lenders to give small businesses access to loans. The lending target was £76 billion, and £75 billion was lent. So it was a success, then?

Not really, according to the Federation of Small Businesses (FSB). "Project Merlin targets were set artificially low in the first place", says John Walker, national chairman of the FSB.

The fact is that more than one in five firms still cite access to finance as a major barrier to growth, with 41% of loan applicants being refused, according to the FSB 's latest survey. Despite this, confidence is rising in the small business sector, with more than half of the organisation's members hoping to grow in the next 12 months.

National Loan Guarantee Scheme

The government's latest attempt to help turn these hopes into reality and ease the estimated funding shortfall of up to £59 billion is a £20 billion credit-easing scheme - the National Loan Guarantee Scheme (NL GS). Under the scheme, Barclays, Lloyds TSB , RBS and Santander have agreed to offer interest rates that are 1 percentage point lower than loans outside the scheme.

But small business owners have grown used to disappointment with government schemes and should not raise their expectations now, according to business groups. Reaction to the NLGS has so far been underwhelming. For a start, businesses banking with HSBC need not apply – it said that the loans were not commercially viable.

The scheme has also been criticised for being open to businesses with turnover of up to £50 million, meaning money may not get through to credit-starved young start-ups that really need help.

Experts say that like Project Merlin before it, it does not address the issue of banks' strict lending criteria - the biggest barrier to finance for entrepreneurs. Consequently, says John Longworth, director general of the British Chambers of Commerce, "it will not help the smaller, younger and high-growth firms that have trouble getting credit in the first place".

Fortunately, there is a growing range of alternative sources of finance. These do not "yet have the scale to challenge seriously traditional banking sources of finance", but are "innovative", according to the FSB, which expects them to flourish as the financial services industry spots new opportunities.

Peer-to-peer lending

Finance options remain limited for entrepreneurs just starting out, who have no capital or past accounts and usually have to tap up friends and family. But even at this early stage, there are alternatives. Online, peer-to-peer lending platforms such as Zopa are a way for individuals to borrow from other individuals for whatever purpose, to a maximum of £15,000.

Martin Campbell, spokesperson for Zopa, says: "The lending decision is based on the creditworthiness of the individual and not the purpose of the loan. So for entrepreneurs looking for seed capital who do not have rich uncles or aunts, Zopa isn't a bad place to start."

For larger peer-to-peer loans, Funding Circle is an online marketplace where small businesses can seek loans from investors. The average loan is £39,332 (although loans are available between £5,000 and £250,000).

The advantage of Funding Circle over banks is speed - loans can be received within two weeks of the application. However, businesses need to be well-established to apply, and must offer either a personal guarantee, or security over the specific asset being purchased or over all the business assets.

‘Crowd funding' is another relatively new way of raising finance at any stage of business growth. It is helping to plug the gap left by banks' strict lending criteria, as businesses do not need trading histories to apply, however, they do need strong business plans and forecasts, and they need to be prepared to give equity stakes in return for funding, rather than repaying interest on a loan.

The idea, according to Luke Lang, co-founder of crowd funding website, is that entrepreneurs bring their own ‘crowd' of friends, family and colleagues and potentially benefit from investors who've already invested in other firms.


Businesses seeking funding of more than £10,000 via Crowdcube send an application to the website; if successful, a funding pitch is posted online with a target amount. Investors buy equity stakes and hope for a return within three or four years.

Lang says: "It is a great way to accelerate growth, particularly for pre-capital businesses with great ideas, plans and forecasts but not necessarily a trading history. And it gives easier access to high-risk small companies for investors, who can invest very small amounts if they wish."

For unemployed young people aged 18 to 30 with businesses at the ideas stage, low interest start-up loans are available through the Prince's Trust ( via its Enterprise Programme. Those taking part may be eligible for up to £5,000. Unemployed people of all ages who want to start a business can also apply for the New Enterprise Allowance and receive loans of up to £1,000 from providers across the UK.

Business angels

Business angels are a popular option for companies in their very early stages. Banks sometimes refer those they reject to angel networks instead.

An angel investor is an individual, acting alone or in a syndicate, who invests their own money – usually up to £1 million - in an unquoted business, then takes an active role in its development. It is a high-risk form of ‘patient capital' – meaning the investor can remain involved for years.

To impress an angel, Alexander Sleigh, network co-ordinator of London Business Angels, says a company needs "an experienced and credible management team; scalability, which means the potential to deliver a return worth 10 times the original investment; evidence that there is a need for the product or service; a competitive position; past proof of the concept succeeding, and an identified exit route such as a trade sale or public markets".

Entrepreneurs can contact the British Business Angels Association ( for more details on how to find an angel.

If a company has crossed the ‘established' threshold and has three or four years of accounts, it might finally be eligible for that bank loan. Lloyds Banking Group says it is currently approving eight out of 10 requests for loans or overdrafts from small businesses.

Another alternative for older businesses looking for funding of more than £2 million is venture capital. Venture capitalists invest on behalf of their own investors and are answerable to limited partners – and so tend to invest in less risky companies than angel investors. For a list of venture capital firms, contact the British Venture Capital Association (

All this makes a trip to see the bank manager suddenly look a little old-fashioned.


  • Keep it concise – no more than 10 pages covering your management team, market, product, revenue model, competition, funding requirements and financials is sufficient.
  • Ensure the amount you are seeking and your funding gap are aligned – if you have a funding gap of £10,000, you shouldn't be trying to raise millions!
  • Highlight the problem you solve and why you do this better than the existing products in the market.
  • Show how your business can grow and gain a signifi cant piece of the target market – angels look for 10 x return on their investment.
  • Avoid jargon and acronyms – angels are normally generalists so avoid overly technical descriptions and ensure the person in the street can understand your product.
  • Be transparent and truthful about your trading history – ‘skeletons in the closet' will ruin your credibility further in the investment process.

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