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Bank finance: What options are available to startups and scaleups?


Neil Bellamy, head of technology, media and telecoms at NatWest, explains the different types of funding startups can get from banks.

When considering any type of loan, the first question is to ask yourself is: “Is my business ready for debt?”

The key consideration is do you have a product that works and clients that are willing to pay for it? If the answer is yes to both then you will be able to find some form of bank debt to accelerate your growth.

But what are the options, what type of finance is available, and what is the best option for you?

Small business loans

Most banks offer loans targeted specifically at small businesses, which can help encourage growth. With a set loan, you know how much you’ll pay each month, allowing you to manage your cash flow in line with your plans. Terms can range from one to 10 years and are suitable for most types of small to medium-sized businesses. This type of loan is best suited to longer-term investments like assets, people or marketing. Some banks offer these loans backed by a government guarantee if you lack the collateral that may be required.

Business overdrafts

A business overdraft could help boost cash flow when it matters or help when an unexpected cost comes along. With an agreed limit you only use what you need, giving you peace of mind with your cash flow. Overdrafts are typically used to fund short term working capital like debtors, stock or contract staff wages.

An overdraft requires you to pay interest on the amount you borrow, which can be significantly higher if the overdraft is not agreed beforehand, so be sure to review your requirements regularly.

Credit/charge cards

Business credit cards can provide flexible and convenient short-term funding for businesses as and when required. Many business credit cards will come with additional benefits including travel insurance or air miles too so it’s worth shopping around to get the best deal for your business. Charge cards, where you clear the amount every month, also are a good alternative as you don’t pay interest.

Use your assets

Asset finance allows you to free up cash tied up in existing assets or obtain money to acquire key assets. It includes:

  • Contract hire, an operating lease that’s usually used to finance cars and vans for businesses.
  • Hire purchase agreement, where you take ownership of your asset by making regular rental payments with the option to buy at the end of the agreement.
  • Finance leasing, which lets you rent an asset rather than buy it outright.

The products available differ depending upon the bank or finance provider in question. For example, our asset finance partner Lombard offers a software licence solution which recognises the value of software development as an asset. It’s designed for businesses that have developed their own software and own the intellectual property. You sell the software to them and they license it back to you for an agreed term.

Businesses investing in assets could also be entitled to recoup part of that investment through tax savings through the government’s Annual Investment Allowance.

Invoice finance

Invoice finance is another way to help free up cash. It takes two forms:

  • Invoice factoring: primarily aimed at smaller businesses who do not have a large finance department. The lender essentially becomes your credit control service. They can advance up to 90% of the value of your invoices and collect the payments from your customers.
  • Invoice discounting: a lender will advance you a proportion of your outstanding invoices and chase payments. The remainder is paid, less fees, once the invoice is settled. This is mostly aimed at larger businesses (typically above £2m annual turnover) and requires well-established systems and procedures in credit control and sales ledger management.

Venture debt/mezzanine finance

Despite my initial consideration on whether you are ready for debt, some banks are prepared to lend before the product is working or clients are paying for the service. Partially stepping from debt into the equity funding arena and role of venture capitalists.

The costs are very high to reflect the risk, with short term periods and sometimes equity warrants are included, which mean you give up equity if you fail to meet the repayment. Usually, a bank will only advance this loan if it sits alongside a venture capital investment.

Personally, I’m not a huge fan as it can put unnecessary pressures on a management team which can lead to rushed, short-term decision making when long-term equity is a much better capital structure. However, a small number of banks are providing these loans to a highly selective group of tech clients, so it’s worth covering in this piece.

Decisions decisions

Before making any decisions, remember that there are now many alternative sources of funding available including crowdfunding, peer-to-peer, angel investment etc. Bank borrowing (debt) may not be the best option for your tech startup.

Just be sure to consider all of your options and consult with your technology banker to help you make the right decision for your business.