Alternative methods of raising funds
Business growth has traditionally been financed by banks, venture capitalists or angel investors. But sometimes the traditional route is not always ideal. Nowadays the potential funding opportunities have diversified. If your company is struggling to raise finance, consider looking for an alternative method of funding to get the cash you need to growth.
Crowd funding
Crowd funding is a collaborative system that pools the collective wealth of a network of individuals and uses this fund to lend to companies. Its use in the business sphere is relatively recent although charities have used it for some time. The biggest advantage to crowd funding is the reduced risk to each stakeholder. Each person can contribute as much or as little as they want to the investment pot. Some people may provide £10, whereas others may offer thousands.
It’s important to do adequate research before using crowd funding. Check the terms and conditions very carefully to ensure you get exactly what you want from the deal. The popularity of crowd sourcing has led to a significant number of websites popping up so make sure you choose a reputable one that’s authorised by the Financial Services Authority (FSA).
Peer-to-peer lending
Peer-to-peer lending is a relative newcomer, and connects individual borrowers with lenders (with the broker taking a fee for providing the service). The internet has been instrumental in the rise of these types of sites and there are now a number of players in the marketplace. Peer-to-peer lending is an umbrella term that covers a range of different situations. Some crowd funding sites will be peer-to-peer services in that they connect investor and business directly.
Generally speaking, however, peer-to-peer lending works on two principles: disintermediation and social networks. The former refers to the removal of intermediaries in the supply chain, in this case traditional banking institutions that charge a premium. The latter refers to the reliance of some peer-to-peer lending networks on the customer’s own social network, with the idea that people are less likely to default to those they already know. The site simply formalises the agreement between two consenting parties.
James Meekings, director and co-founder of Funding Circle, a peer to peer lending platform which allows savers to lend money directly to small businesses, told inspiresme.co.uk: “At some point, all businesses need funding, whether it’s working capital, funding for growth and employment or an injection of finance to purchase assets. Until recently, the only option has been to go to the bank to get a loan, an arduous task for many which can result in many lost days of work time while being, in many cases, prohibitively expensive. That’s not to mention the fact that so many are turned down, or worse, have their existing overdraft facilities reduced as a result of asking for funding.
“Small business owners are notoriously busy, and the loan process can be extremely time consuming: a business owner will have to spend hours filling out forms and meeting with a bank, and then wait weeks and weeks to hear whether the loan request will be granted. On top of this, cross-selling by banks takes up further time which business owners simply don’t have.
“Peer-to-per lending is about questioning the old way of lending or borrowing, stripping the unnecessary procedures out while maintaining a solid and fundamentally workable model. Small businesses want a process that doesn’t take days out of their lives, while being affordable so that they can get on with what they’re good at. Through peer-to-peer lending environments – where savers lend directly to small businesses – companies benefit from competitive interest rates and reduced approval time, and as a result, a growing number of businesses have been able to access funding without having to go through banks.”
Friends and family
Borrowing from friends and family brings an unavoidable emotional element to the investment and can therefore be risky. Family members may want more control over the business, or tense business decisions could alienate a close friend. However, many businesses do successfully raise finance from friends and family and enjoy a range of associate benefits including less aggressive repayment plans.
If you do decide to go down this path, consider using an intermediary company that formalises and legalises the process for a small fee. Please read our guide to raising funds from friends and family for more information.
Demographic-based finance
Depending on your personal circumstances there may be specific sources of finance available to you. For example, the Black Business Initiative (BBI) supports companies started by black and minority businesspeople and Prowess helps women succeed as entrepreneurs.
There are also loans and grants available to small businesses from local government. The Regional Growth Fund (RGF) is a well-known example and supports projects that encourage private sector development. Because local governments differ so widely between regions, it’s best to talk to a local business adviser to find out what’s available. Take a look at our guide to small business grants for more information.
