If you have never dipped a toe into the waters of alternative funding, it can be difficult to know where to begin. Here’s a starter’s guide
Growing businesses are still struggling to unlock the cash they need to grow, following the 2008 financial crisis.The ramifications of the recession have meant banks remain cautious. So much so that The Bank Of England has just released figures showing that net lending to SMEs has fallen by £300 million, while the British Bankers Association has seen a £2.7 billion drop in the value of net loans.
Banks have been encouraged to lend more via schemes such as the Funding For Lending initiative, introduced by the Government in order to kick-start corporate borrowing. In practice, however, four in ten businesses’ first-time loan applications are still rejected by banks.
This is massively frustrating to business owners with plans to grow who are being held back by traditional lending routes.
In reaction, many businesses, especially small and medium sized firms on a growth spurt, are choosing to source alternative funding sources. These alternatives are now said to contribute £1.5 billion to SMEs in the UK annually.
If you have never dipped a toe into the waters of alternative funding, it can be difficult to know where to begin. Crowdfunding, peer-to-peer lending and angel investment are all gathering in size and influence in this rapidly evolving sector.
Here’s a starter’s guide on understanding which option might be better for you and what you should expect from the process.
Peer-to-peer funding
Is it better than a bank? Well, for a start a peer-to-peer (P2P) application is more likely to end in a ‘yes’.
However, in terms of the process, it’s similar to a normal bank loan as credit checks are carried out and you will be charge interest on your repayments.
However, because of the young nature of P2P businesses, they are much more flexible than high street banks and more willing to negotiate when it comes to the amount being borrowed and repayment rates. Furthermore decisions are generally made quickly, with the lender deciding how much they’d like to invest and the rate of interest they are comfortable offering, over a defined time period (from months to five years).
P2P funding is organised through dedicated platforms (some listed below) which act as marketplaces linking investors with businesses.
P2P investors tend to be business people themselves, which accounts for the speedy decision-making and the fact capital is actually being made available. They have been in the same position as the owners borrowing and are naturally more sympathetic.
Potential drawbacks
If your business credit really isn’t good, this will be revealed at the credit check stage and you need to explain the situation, if you hope to progress further.
Additionally, because of the individual nature of the arrangement, there is no ‘standard’ interest rate. It can sit around the seven to 10 per cent mark.
Finally, an arrangement fee will be charged; this can total five per cent of the amount being borrowed.
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Some P2P platforms to explore
This peer-to-peer lending organisation was set up in 2010 in direct response to the high street banks’ failings when it came to SME loans. Last year, it hit a major milestone by announcing it had distributed £1billion in business loans. It is growing at such a rate, that it expects to lend another £1 billion in 2016.
MarketInvoice has lent over £600 million since launch with approximately half of this amount coming in 2015 alone. The company is one of the British Business Bank partners having lent over £50 million through the BBB program.
Founded in 2011, this links experienced investors with established business borrowers. |
Crowdfunding
This is an almost Dragons’ Den style to lending, with businesses ‘pitching’ online to try to gain investment from interested parties.
Reward-based crowdfunding gives personal gifts to each person who invests in a project, while equity crowdfunding releases a portion of the company’s stock to each investor.
Angel investment
Business angels are out there and looking for opportunities to invest. They often work alone and have around £500,000 to invest. Try the ukbusinessangelsassociation.org.uk to find one that might suit you.
It’s likely an angel will put their money into a sector they are already familiar with and may also contribute their expertise to you and any relevant business advice.
When pitching to an angel, be sure to disclose your full business background, including key personnel, their expertise and skills.
You will definitely need to show your business plan, demonstrate that the company has a USP and your targets are for growth. Expect questions on your track record to date.
You will also need to provide a business angel with an exit strategy, whether it’s after one, three or five years.
Sean Blanks is the marketing director at cartridgesave.co.uk.
