Alternative funding

SMEs are hugely responsible for driving the UK economy, with a total annual turnover of £1.8 trillion. Despite this, they have a legacy of encountering enormous trouble when it comes to securing funding through banks.

While there has been much innovation when it comes to the tech that helps these businesses work more efficiently, increasing both productivity and profits – there is still the issue of securing funding. With all the will in the world, it’s hard to push your concept or offering to the next level without a cash injection; below we have listed some of the alternative methods of funding a business that are available.

Crowdfunding

Crowding funding has increased in popularity over the last two years, popular websites for this type of funding are Kickstarter and Indiegogo. These sites enable businesses to pool investments from a number of different investors rather than sourcing one single, large investment.

Since 2011, it is reported that banks have withdrawn overdrafts from SME’s at a rate of £5 million per day, and approved overdraft applications has fallen by 47% since 2012.

Sites such as these vary in the way that they work; some will allow businesses to raise the money in exchange for rewards or products and other use an equity-based model, in which investors are also provided with a small share in the business.

As well as connecting with investors who can supply that all-important cash injection, crowdfunding can provide a business with much more than a way of raising cold hard capital. Equity crowdfunding can also provide you with a group of interested, experienced investors who are incentivised to support you in achieving business success! They can help you to make new business connections and provide advice based on experience – all helping to grow the business.

In order to secure the best investors on crowdfunding sites, ensure that you go armed with a solid business plan, marketing strategy and great offering to ensure you can secure some excellent investment.

Venture Capitalist

A Venture Capitalist is a company that makes large investments into a business that is past the start-up phase and already generating revenue. They often invest in to businesses with a high growth potential, or those that have demonstrated high growth.

Venture capitalists are inherently experts in specific industries; they look for businesses with a strong competitive edge, an innovative or unique offering and a strong management team. It is common that a large investment (often £1 million and upwards) is made in return for a large equity share of the company and a seat on a company board to allow them to influence its direction and secure a return. In most cases, Venture Capitalists will look to recover their investment and return within 3-5 years of the initial investment being made.

Angel Investors

Angel investors are often successful entrepreneurs in their own right, investing personal funds in start-ups or early stage businesses in exchange for equity ownership.

Success stories of businesses with angel investment include Facebook, Google and Yahoo. The difference between Angel Investors and Venture Capitalists is that the relationship between an angel investor and a business is of a friendlier, more ‘hands off’ nature and the investment amounts are significantly lower, typically around £10k- £100k.

Often businesses will begin with an angel investor, and once their concept is proven and they have experienced growth, they may look into receiving another injection from a venture capital firm.

Peer to Peer Lending

If you have been unsuccessful in securing traditional forms of business funding, such as a bank loan, you could turn to peer to peer lending networks. These platforms allow lending transactions to take place directly between individuals.

Websites such as LendingClub are among the most popular; businesses or entrepreneurs on this site seek to find a loan of a specific amount at a specific rate of interest. Lenders fund the entire loan, unlike crowdfunding where a number of people provide capital. The loan is paid back with interest over a set length of time, but it is vital in these instances that a credit check is passed in order to find a loan.

Product Pre-sales

Product pre-sales can be a highly effective way of generating the money needed to finance your business. There have been a number of examples of entrepreneurs raising large amounts of capital via pre sales that have then gone on to fund inventory, especially if your product is proving to be extremely innovative and is already in demand.

This method is one that is likely to be the most difficult to co-ordinate as it will be extremely challenging to forecast sales, but can also work very effectively with a marketing strategy and open doors in retail shops too.

With the marketing of lending options becoming seemingly expansive, making it easier to fund a business, responsible business owners must be honest with regards to how much they truly need. It’s necessary to be disciplined, especially if more funding than originally required is received. Some experts even urge you to bring on an experienced business partner to ensure accountability of a large cash injection. Of course, if you have opted for crowd funding or angel investing – you could have a ready-made partner right there! The idea of funding is obviously to drive a business forward, but it’s wise to embrace any experience and expertise that you also receive with it.