Alternative ways to fund your business

Around the turn of the century, financing options for small businesses were limited to traditional financial products. These include business loans and the variations of them such as asset finance or vehicle finance, and business credit cards. 

Fewer options meant fewer opportunities. 

Fast forward twenty odd years and the landscape is considerably different.

From firms looking to change up the banking industry, commonly referred to as challenger banks, to opportunities that online global connectivity has made possible - accessing the funds needed for business has become a hive of fast-paced innovation and activity. 

It’s hard to keep up. And while having more options makes for a competitive market offering more opportunities, it can also make decision making complicated and exhausting.

With access to cash being an ongoing issue cited by many small businesses, particularly from the more traditional banking avenues, let’s highlight some of the alternatives out there.

Crowdfunding 

If you’ve got an exciting business idea, or an opportunity within your existing business that needs funding, crowdfunding could be worth thinking about. 

Crowdfunding isn’t anything new - in fact seemingly old-fashioned models like subscription services are a form of crowdfunding. But the modern equivalent is an exciting and innovative way to raise funds from a large number of people - and it’s only made possible for the many by the instant connectivity we all now have thanks to the internet. 

With websites like Kickstarter and GoFundMe, the general approach is broadly the same. Set up a page for your business, product, service or idea that explains what you’re doing and why you need money. You can entice potential backers with incentives such as goodies related to your product or try and rally backers by inspiring them with your idea. 

You’ll usually need to define the amount of money you’re looking to raise, and if you don’t reach the amount then you may find any backers who had donated will be refunded. But if you can raise the amount you set, you usually won’t need to pay anyone back. 

Venture Capital Schemes 

There are three main types of venture capital schemes: Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT). There was also Social Investment Tax Relief (SITR), however from April 2023 SITR was no longer available for new investments.

So what is this? 

In essence this is a way of raising money by attracting investment. The attractive element comes from tax reliefs which are given to investors who buy (and hold) new shares for a set period of time. 

There are very specific conditions for who can apply, invest and what the investment can be. And of course you’re also giving up equity in your business. So if you’re thinking about a venture capital scheme, be sure you thoroughly understand what’s required. The government website can be a helpful starting point. 

Peer to peer (P2P)

As there are only a limited number of traditional banks, there are only a limited number of places to apply for a traditional business loan. 

But with P2P lending, that limited number has widened considerably. You’re not asking one firm for a loan anymore, you’re asking the general public.

You start by visiting a P2P lending platform such as Funding Options or Funding Circle to name a couple. You set the amount you’re looking to borrow alongside the term and then the platform carries out an eligibility check. If approved you’ll receive the funds. Because the pool of lenders is higher, with different individuals chipping in different amounts, the interest you’ll pay can be lower than with a traditional bank loan. The whole process is usually much quicker too. 

Revenue based financing (RBF) and invoice factoring

If you’re looking for finance and flexibility, RBF or invoice factoring might be worth considering. With RBF you receive money upfront in exchange for future revenue. Effectively you get the money before you make the money. 

Invoice factoring is similar, only the money is paid on invoices rather than revenue. You effectively pass your unpaid invoices on to a third-party who then collects the money from your customers for a fee. It's similar to invoice financing.

These aren't really an option if you’re thinking about starting a business or you’ve been trading for six months or less, mainly because it’s unlikely you’ll have any profit to forecast and borrow against for RFB, or any invoice history for invoice factoring.

But if you’re more established, with a high gross margin and consistent monthly income, and you're in need of cash quickly, RBF or invoice factoring is an option. You also don’t lose any equity in your business. 

Angel investors 

The best way to visualise what an angel investor is and what they do is to familiarise yourself with TV shows like Dragons’ Den and Shark Tank. 

You showcase your idea to an angel investor who offers money in exchange for a stake in your business. The percentage they take can be open to negotiation, but it’ll usually be on the higher end if you’re also looking to take advantage of the investors knowledge and expertise or if your idea is underdeveloped.

You may agree on a repayment strategy, for example you might agree to pay the angel investor back in year three and they might agree to reduce their stake in your business when their money is returned. 

Angel investors can be a great option for budding entrepreneurs as you’ll benefit from mentorship as well as the cash injection. But with that comes a loss of control, and there’s no guarantee that your business will succeed just because you have an angel investor.

There are even more options to consider too - so if you fancy reading more into funding alternatives to loans, check out our guide.