Alternative small business funding: how to secure finance without a bank loan

piggy bank

If your business is doing well, there may well come a time when you’ll need to raise investment in order to grow and expand further. While the traditional route of securing a bank loan remains attractive to many business owners, it’s not always as easy as getting an appointment, making a quick pitch, showing your bank statements and walking away with the money you need! For many small business owners, it’s a good idea to consider some of the alternative business funding methods that are available. Here are a few options you might want to consider:

Alternative small business loans

Banks aren’t the only places that can give a loan to small businesses, there are many other reputable organisations that provide finance for businesses in a range of different ways. You might be able to secure finance through a lender that specialises in short-term loans based on your trading or stock, for example. Alternatively, you might have access to asset finance, factoring or another kind of bespoke short-term business loan.

If you’re interested in alternative lending, be sure to conduct some in-depth research to identify the right option for you and your business. You might find it helpful to use a finance comparison service like Funding Options to do this.

Angel investment

Angel investment can be a great method for financing a small business with strong growth prospects, as potential investors will consider the future potential of your business, as well as its current performance. Angel investors tend to understand that many small business owners often have limited business experience, but they also know that these founders sometimes go on to build very successful companies.

If you’re considering raising finance through an angel investor, you should conduct some thorough research to identify the most appropriate potential investors for your business. You might want to check out an online community such as AngelList as part of your research. It’s also worth asking any of your peers who have raised finance through angel investors for some feedback about the process. You might even want ask them if they could provide you with a “warm” introduction to a friendly investor who might be interested in your business.

Investors are often more likely to invest in a passionate entrepreneur who has a compelling prototype and some early customers than in a slick presentation. With this in mind, make sure you focus on preparing an authentic pitch, rather than creating an impressive set of PowerPoint slides.

Crowdfunding

Crowdfunding could be a great avenue for you to explore if you have an exciting product or service and you think you can highlight the value and potential of your business to a wider audience.

If your business is in its early stages and you’re still developing ideas for it, you may want to look at a platform like Kickstarter, which allows businesses to offer incentives (such as merchandise and special experiences) in return for investment.

Larger businesses looking for wider growth can benefit from using equity crowdfunding platforms such as Seedrs to offer shares in the company, which investors can purchase by investing in the company. That's the route we took when we ran our first-ever crowdfunding campaign, raising more than £1 million in just over two months.

If you’re considering raising investment through crowdfunding, remember to make your business case as compelling as possible and be prepared to answer some in-depth questions about your business. Crowdfunding investors are no different to angel investors - they want to know that they will be making a shrewd investment before they part with any cash!

Peer-to-peer lending

Peer to peer (P2P) lending is another way of borrowing money without going to the banks. P2P lending services operate in online in marketplaces where individuals and businesses that want to lend money are matched with businesses that want to borrow money. You can find a list of services on the Peer2Peer Finance Association (P2PFA) website. Some services spread the investment out among borrowers whereas others allow lenders to choose specific businesses to invest in.

By cutting out the middleman and reducing overheads compared to traditional financial institutions, many P2P lending services can offer higher rates of interest for lenders and lower rates for borrowers. This has led to a rise in popularity and in the second quarter of 2018, P2P lending contributed over £1 billion to the UK economy. However, from the lenders point of view, being connected directly with a borrower comes with greater risk if the borrower fails to repay.

For borrowers, especially those with a poor credit score, P2P lending might seem like an easier way to secure funding than through a bank. However, just as with any loan, missing payments or defaulting will affect your credit score and make it more difficult to secure funding for your business in the future.

Government grants for small businesses

Although not necessarily a method for securing all of the money that your business might need in order to grow, it’s still a good idea to research all of the potential grant schemes that might apply to you. After all, some financial assistance is better than none!

It’s important to identify and apply for the grants that are most appropriate to your business. If you plan to grow and take on new staff, for example, you should check whether there are any schemes that specifically encourage businesses that create or safeguard jobs.

If you’re unsure where to start in your search for a grant, check the UK government’s website to find out what funding is available for small businesses in the UK. You’ll find a host of useful information to help business owners find potential grant and support schemes. Bear in mind, though, that the competition for grants can be fierce, so it’s important to make sure your business pitch is as good as it possibly can be before you start making applications.

Beware the risks of funding alternatives

As with any financial service you use, you should check that the service is regulated by the Financial Conduct Authority (FCA) and other appropriate bodies where appropriate. For example, for P2P lending you should check that the service is regulated by the Peer2Peer Finance Association (P2PFA).

You should never view alternative funding available for small businesses as “easy money” and you should always consider your ability to repay. If you’re thinking of alternative funding for your business, you should check with your accountant or other financial professional to make sure you have carefully considered all the potential outcomes.

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