With many UK businesses struggling to access traditional bank finance, and increasingly turning to alternative funding methods, here are a few options that you might not be aware of as an early-stage entrepreneur.
In the UK, 90 per cent of business loans are provided by just four banks, despite the fact that few small business owners trust their banks to look out for their best interests or support their business.
This is according to a recent report by the government and the Financial Conduct Authority (FCA), which concluded that the market for small business lending is oligopolistic in nature; the UK offers a limited number of providers and high barriers to entry.
However, there is evidence to suggest that small business awareness of alternative funding options may be one of the main obstacles at play here, as the majority of business owners rejected by their banks often do not go on to apply for any other sources of funding. In fact, the British Business Bank reported that the percentage of small firms that only approached one provider is around 71 per cent.
What’s on offer when it comes to alternative funding?
So what other options does a small business have? Take a look at this glossary of alternative funding terms to see if one might be applicable to financing your business.
Angel investor – An angel investor is a wealthy individual that offers funding for a startup or small business, often in exchange for part ownership of the business – think Dragons’ Den. If you reach out to an angel investor, bear in mind you are asking them to put their hands in their pockets for your idea – make sure you can explain your project in an articulate and well-informed manner to impress them.
Crowdfunding – Basically this is where a small business owner takes their idea to an online platform and asks a crowd of people to put up investment.
Often, the entrepreneurial firm will set a goal amount to raise and must raise the whole amount to receive any funding at all. In other cases, it would keep all the money raised regardless. Be sure to identify what rules the platform you choose to crowdfund with has in place.
Asset finance – Asset finance loans allow businesses to borrow money against the assets it already owns, wagered against repayment of its debts. If the company cannot make good on what it owes, the lender can seize the assets offered as collateral against the loan.
Assets can include property such as buildings and warehouses, equipment, inventory, or accounts receivable.
Invoice financing – This is where a lender will loan a business money against its unpaid invoices – in other words, money you will have in the future.
There are two kinds of invoice finance: factoring, where an invoice financier will manage a business’ sales ledger and collect money owed themselves; and invoice discounting, where the financier lends money against unpaid invoices, but the company in question is responsible for collecting is own debts and paying them to the lender. Typically, invoice discounting can be a confidential arrangement, whereas factoring usually means the client will be aware that invoice finance has been used.
Challenger banks – A challenger bank is a retail bank that in some way seeks to challenge the Big Four banks. This can be through an offering of better deals or services for small businesses and startups.
The Competition and Markets Authority (CMA) has recently introduced a range of far-reaching measures to open up competition between banks and force them to be more transparent. If these measures pay off, in the future we may see more small businesses taking out loans with these sorts of banks.
Alternative funding in action
Franchised SME consultants Business Doctors www.businessdoctors.co.uk has benefited from short-term, unsecured funding from two places in the past. Co-founder Rod Davies explained:
“[Our funder] allows us access to a pot of cash up to maximum of £30,000. We can dip in and out of it to help with our cash flow and we only pay interest on the period of time we are borrowing the money. So if we need a cash boost for just two days, that’s all we pay for. It’s totally flexible – we don’t need to agree the lending period in advance – and we just dip in and out as we need. We recommend this to our customers too.
“Another short term unsecured loan that has helped us hugely was via a peer-to-peer lender. We wanted to borrow £100,000 last year and were approved within three days. We had the cash in our account within the week. [This lender] works by investors bidding on how much they want to lend to your business and the return they are looking for. As more investors get involved, the interest rate goes down. So bidding started at 14 per cent and in the end, we had 60 individuals lending us £100,000 between them, at a rate of eight per cent. Again, as a network, we recommend this to our customers.”
Every potential funding platform has its advantages and disadvantages so be sure to do your research before choosing one. Every small business will have its own model and vision so it’s important to ensure your alternative funding provider aligns with where you want to go.
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