Whether you need working capital, plan to expand into a new market or ramp up production, getting access to finance can give your company the boost it needs to grow.
However, as Business Matters reported back in December, over 40 per cent of companies say they would have to put their expansion plans on hold if they could not attain funding.
Research shows that most SMEs turn to traditional sources of funding – such as overdrafts, credit cards and bank loans – when they need a cash injection. What’s more, many are unaware of – or are unclear about – the recent expansion in alternative forms of business financing such as crowdfunding or P2P lending. That’s a shame, because many of these new funding options are very well suited to the needs of SMEs and start-ups.
Let’s look at alternative sources of funding for SMEs in the two main types of business financing models – equity and debt.
Equity funding is a kind of business financing where you hand over a stake of your business in return for investment. The investor will either expect a return in some form of dividends, or to take the cash out of the business once they have made a healthy return. Generally speaking, ‘traditional’ equity crowdfunding would have come from investment from friends and family.
Pros and cons of equity funding
For the business owner, the benefit of equity funding is that risk is spread – if your business collapses, you will not typically be required to pay back all the money. On the other hand, equity funding means you may have to hand over control of the business in some way, and the investor may be able to influence your company’s decision making.
Types of alternative equity funding:
There are a few different types of equity funding you could look into:
- Equity crowdfunding
Websites like AngelList, CrowdCube and Seedrs provide a platform where you can promote your business, set out your terms and receive funding from investors online
- Angel investors
Angel investors are high-net-worth individuals (or sometimes syndicates) who will provide funding and mentoring for your growing company. You will find angel investors on sites like AngelList or Angels Den, but you may also meet them at start-up events or at incubators
- Venture Capital
Venture capital funds tend to invest in high-potential firms who have been in business for a few years. A venture capital fund typically deals in bigger numbers when it comes to investment, and may also ask for more control of your company too
Debt funding is another way of raising cash for your business. Debt funding essentially involves you taking out a loan of some sort which you then pay back in an agreed timeframe. The traditional (and still most common kind) of debt-funding comes from banks – either in the form of a bank loan or through the use of your overdraft.
However, there’s been an expansion in alternative forms of debt-funding in recent years. This partially came about because banks are more risk averse since the 2008 credit crunch, but also because the internet has allowed for the creation of platforms that facilitate new kinds of debt funding.
Pros and cons of debt funding
The major advantage of debt-funding is that you don’t need to give up control of your business to investors – instead, you just pay them back what you owe. But, the drawback of debt-funding is that you are, well, in debt. You have to pay back your loans within an agreed time frame, as well as the interest you have accrued.
Types of alternative debt funding
Here are some of your options for alternative debt funding:
- Peer-to-peer (P2P) lending
P2P lending is an increasingly popular alternative to traditional lending, whereby individual investors provide loans to your business that are typically faster and easier to secure than bank loans. P2P lending platforms allow you to advertise your business on websites like Funding Circle and Zopa and then ask multiple lenders for (typically) small loans
- P2P invoice finance
Cashflow is king. If your small business has issued an invoice to a client you know will take weeks or even months to pay off, you might benefit from turning to a P2P invoice finance broker. Platforms like MarketInvoice allow investors to provide you with up-front cash against future invoice payments in return for a fee. This means you get most of your invoice payment today – not when the client pays up
The right funding at the right time
The expansion in alternative sources of small business funding is exciting news for start-ups and entrepreneurs. By looking beyond the traditional methods of business financing, you may well be able to access capital which better suits your needs and your business growth plans.