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Five ways to avoid your bank

This entrepreneur is using a calculator

Many businesses, especially smaller ones, are over reliant on one bank. When recessions strike—another one is overdue—banks have a nasty habit of pulling the plug on SMEs. Here are five ways for a business to reduce reliance on its bank.

1. Crowd funding

For inspiration, look at the “about us” section of Kickstarter—https://www.kickstarter.com.

What is inspiring is not so much the numbers but the diversity of the projects.

I am not advocating Kickstarter necessarily but using it as an example of the model that deploys small amounts of money from large numbers of people to fund all sorts of projects or businesses.

Crowd funding platforms come in many shapes and sizes and specialise in different projects and lending. These sites will help you get started with your research. This site is a good backgrounder www.moneyadviceservice.org.uk/en/articles/crowdfunding–what-you-need-to-know

These sites offer access to funding or to other funding platforms
www.crowdfunding.com , www.crowdcube.com ,
www.ukcfa.org.uk/about-us/members/

Crowd funding is a great way to raise funding without going cap in hand to a bank.

2. Private equity (PE)

PE firms gather investors’ funds to invest in businesses. They typically make equity investments although they may provide debt as well. How big an equity stake they seek will depend on each individual case. PE firms may require board membership of investee companies.

A good place to start your research is the British Private Equity and Venture Capital Association www.bvca.co.uk They have over 300 members, so it’s important to find one that invests in businesses like yours.

One point to note is that PE businesses will always say they are “long term
investors”. For some PE houses 5 years may be long term, others will invest for much longer. In the end they will be looking for an exit but then so may
entrepreneurs. The trick lies in finding a PE firm that shares your goals and who you will be comfortable to have on board in your business.

3. Payment tools

Gone are the days when, to accept a debit or credit card payment, you had to use a chunky terminal supplied by your bank. Now, small devices tethered to a mobile mean that every tradesman, restaurant or other small business can accept card payments, including contactless.

Where to start? Here are a few brands that provide this service. You will need to buy their card reader but the cost is likely to be around £50. They will all charge a commission for the service they provide and this is not necessarily cheaper than your bank would charge:

The last of these is a mobile app with no separate terminal.

To help with your research, try this site to help you sift the competing offers
https://merchantmachine.co.uk/credit-card-machine/

4. Online insurance

Unless your bank is an insurance company as well—and that’s pretty unlikely—when they try to sell you insurance they are merely acting as an intermediary. And “intermediary” most likely means additional cost.

There are now so many direct insurers in the marketplace that unless the insurance cover you are seeking needs to be tailored to very specific requirements, there will be plenty of competing offers. I am here thinking of plain vanilla insurance lines such as motor, household, contents and travel. Comparison sites you will have seen advertised include:

Banks rely on inertia. They make us feel it’s easier to buy from them rather than to go in search of alternatives. It’s easy to go online and do it yourself and it may well be cheaper.

5. Invoice discounting

The benefit of invoice discounting (ID) is that it speeds up cash flow and means you don’t have to use your bank’s overdraft or take out a term loan.

The process is simple. When you invoice your customers, you pass a copy of the invoice to the ID company. They advance a proportion of the invoice amount to you, which could be between 75 and 85 percent. The important thing is that you get the cash straightaway and you need not wait for your customer to get to the end of his credit period before paying you. When your customer pays you, you repay the ID company.

As a cash flow enhancer it can be a real boon, especially if you deal with large, creditworthy customers who take a long time to pay. There are downsides. The ID company is likely to charge a facility fee and also interest on the advance. Also, if your customer doesn’t pay, you will have to repay the ID company anyway. This is called “with recourse” ID. There is a without recourse option which involves paying a premium for the ID company to insure the risk of non-payment with one of the trade credit insurance firms.

Although many of the ID companies are arms of major banks, some are not. The place to start your research is at the website of the Asset Based Finance Association. It has 40 members and you can use the filter on the site to
find the firms that are most likely to meet your requirements. Again, although your bank will be involved in receiving and paying funds, the ID credit line based on your sales is separate from any you may have with your bank.

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