How Israeli start-ups are getting access to fast-growth-finance
Israel, the start-up nation, relies on its ability to access capital and achieve growth in industries such as tech, online and fashion.
Whilst venture capital and raising huge amounts is seen as the norm for most start-ups, many young companies will have a window of opportunity where they can see a huge return – but they need the capital fast in order to make it happen. Below we give some examples of the ‘alternative finance’ or ‘specialist finance’ which is used to help start-ups access fast growth funding.
Invoice Factoring
Invoice factoring or ‘invoice finance’ allows companies to release any cash that is tied up in invoices. There are some businesses which receive big orders but need a lot of capital in order to fund their overheads such as staff, materials and technology.
By showing a lender proof of your invoices, you can receive up to 80% of the cash upfront charged at around 2 to 3% interest per month – and then repay upon the completion of your growth period or when the invoice has been paid. (Source: Funding Invoice)
This is very common for the fashion start-ups, specifically designers that receive an order of something like 2,000 units. They require instant finance to pay for the staff and materials in order to complete the order, and then once completed and their invoice has been repaid, they can repay their invoice loan too.
This type of specialist finance comes in a variety of forms. Invoice factoring means handing over your entire sales ledger and then the lender will be required to follow up repayments for any invoices. Invoice trading is a one-off, pay-as-you-go solution where you can apply for one-off invoices and the borrower is responsible for following up on repayments. As a start-up, you have quite a bit of flexibility with the approach you go for.
Bridging Finance
The concept of bridging allows you to borrow money for a certain purpose and then repay upon the exit or sale of something. Essentially, the finance is helping you ‘get over that bridge’ to your desired destination.
This is a type of loan is always secured on a property, so bridging finance is commonly used by property developers for refurbishments or buy-to-let.
For start-ups, however, bridging finance is used to raise money for expansion purposes. The loan can be secured on your own residential property (under regulated activity) or against your work offices. Using the equity from your property, you can raise the money to help fund your growth.
An example, is a start-up that is eagerly looking to expand. By applying for funds and securing it on their office, they can hire additional staff, purchase new technology and once they have generated more revenue as a result, they can repay their loan.
Companies can borrow between £50,000 to £2 million over 1 to 24 months’ maximum. The rates vary from 0.44% to 2% per month. The loan is secured meaning that if you do not keep up with repayments, you are at risk of your property or offices being repossessed by the lender in order to recover their costs – however, this is usually a last resort and other means will usually be carried out. (Source: Bridging Loan Hub)
Mezzanine Finance
Mezzanine finance refers to the mezzanine of a building – as it is something that falls in between equity and debt. It involves borrowing money from a lender but because the risks are so high, the company is also required to provide some equity in their business.
For the loan provider, they appreciate that with extra risk comes potentially a much higher reward. So they are only willing to borrow assuming that they can get equity in the business. This can be used by start-ups with little security, so instead they are securing the loan on their business.
This type of finance is available from companies that offer specialist finance and this includes some bridging lenders. Companies and start-ups can borrow from £75,000 and the maximum amount can run in the millions. Lenders typically charge interest rates of 12% per annum and look to achieve around 5% to 20% in equity of the business.