Getting bank funding sounds simple, but if you have ever attempted it, you will know that the hoop-jumping can be overwhelming and a positive outcome can be quite evasive. This is especially true if you are a startup or an SME with no credit history and limited trading history.
We hear you, and so we have put together an inspiring list of alternatives for you to consider when pondering how to get funding for your business. Let’s get that funding sorted now!
Personal savings and family options
Using your personal heap of capital is usually the first go-to option unless it is in a superior, interest-earning financial vehicle that delivers higher returns than the interest rate of a loan.
Additionally, if you are leaving full-time employment, then you might have a payout you could use (NOT your pension), a retrenchment package or a second property that you could put on the market.
Family and friends are also options, but it is important that you have a lawyer that will explain the ramifications of a contract and then draw it up. Remember, the lenders must understand there is a risk that they will never get that money back so it shouldn’t be their life savings.
An overdraft is an amount your bank agrees for you to overdraw on your account. Be clear on the interest rate, and remember if you go over that amount, there will be additional fees that can be very expensive.
Overdrafts can be set up with or without surety.
Such a facility can vary from five hundred pounds to twenty-five thousand pounds. You could expect an interest rate of 10% plus fees. If you have an overdraft facility, you are charged fees even if you are not overdrawn, but you are not charged interest in that instance.
This is best used as a short-term option.
NOTE: Overdrafts must be repaid immediately if so requested by a bank. There is no agreed term.
Business grants are a very good option, and there are myriad options available from many different sources, local and international, federal and private.
Grants can be limited to geographic areas, industries, market disruptors, gender, business values and social enterprise impact.
The payout method can be lump sums, staggered payments, reimbursements, or the grantors will match the funding you obtain via other channels.
The grant application process is time-intensive and not always easy to qualify for, but they are a great source of cheap funding.
Start on the UK government website and also look at platforms like GrantFinder. Sometimes the support is not financial but mentorship or subsidies ‒ these are highly beneficial to your business.
Community schemes (CDFIs) is a phrase that rarely pops up in conversation. They are community development finance institutions that supply a combination of financial and advisory input to your business. It is finance-with-a-conscience.
CDFIs have fair interest rates and usually operate as NFPs, so it’s a philanthropic approach to financing. They used to source funding from a combination of government grants and private individuals, but government cutbacks have resulted in many CDFIs shutting down.
The Finding Finance website will direct you towards CDFIs.
Most people think crowdfunding is a hipster invention, but it has been around for four hundred years. It is a wonderful source of funds for small businesses.
A “crowd” of people chip in what they can afford towards a product or service they believe in. All the small amounts can add up to an impressive total if your concept is attractive.
Equity crowdfunding means you are giving away shares in your business in exchange for capital akin to investor deals. You are obliged to reveal lots of internal business information to your equity partners. Remember to keep sufficient shares yourself to allow you to make decisions.
Rewards-based crowdfunding gives “investors” gifts such as a discounted purchase price of the funded product or naming your product, service, components, characters, etc. after investors or putting their name somewhere public.
Peer-to-peer crowdfunding is a loan from a pool of peers, at an agreed interest rate, with a generous payback period or, at least, a payback expectation.
Donation crowdfunding is free money from philanthropically minded people. It usually only works if you have a service that people are desperate to get launched in their area or your business supports the community’s welfare.
This is a new concept in the UK but is increasingly favoured by small and medium-sized businesses. The funding given to you is repaid via a percentage of your sales, i.e. they ‘clip the ticket’ of each sale transaction by a percentage, e.g. 6% or 12%.
This comes with another layer of repayment parameters, such as the total amount repaid off of sales must be a minimum of, for example, 15% of the total loan amount every quarter. When the going’s good, you pay off the loan faster, which is good for everyone involved.
The advance given is calculated based on your projected turnover, so it should be doable.
This can be simply split into two broader sectors:
Funding for vehicles and industrial equipment (outright or lease)
Funding against existing assets (like a surety)
The first option above includes finance methods like HP (hire purchase), which is an arrangement whereby you are paying off the inflated value of an item with the goal of achieving full ownership.
Staying within the first option, funding via leasing for vehicles or equipment is a method whereby you do not gain ownership of the asset. The lessor buys the asset you are interested in or already owns the asset. You then lease it off them, i.e. you pay a rental fee. Some leases require the lessor to service and maintain the asset; some require the lessee to be responsible for that side of things.
The second option listed above is simply hedging the risk of a loan against the value of an asset, i.e. asset refinance. This is similar, in a way, to remortgaging your home and, like a home loan, the amount of financing you can expect to receive is directly linked to the market value of the assets you put up for grabs.
You will rarely be offered one 100% of the item’s value and can expect to receive 80% as a best-case scenario.
That listed asset in the contract will then legally pass into the lender’s ownership if you cannot keep up with repayments or become insolvent.
This type of funding can be stressful and comes with a more complex contract than the other options listed thus far because of its effect on title deeds. It is HIGHLY recommended that you do not sign anything until you have sat down with an experienced lawyer and had the ramifications of the contract laid out in plain language for you.
If you are financially astute and armed with good business acumen, then asset financing will probably not stress you out terribly. Or if you have a few Rembrandts lying around to leverage off, then you will come out smelling like roses.
Peer-to-peer lending (P2P lending), as touched on earlier, is a version of crowdfunding but it is more sophisticated. A group of your peers agree to pool their capital (as an ongoing practice, not ad hoc) and use the power of pool to fund individuals, businesses or causes that they believe in.
Platforms such as Funding Circle were specifically created to enable peer-to-peer lending and offer an end-to-end management solution for the whole P2P lending process. The resources from the pool of peers are collated via the platform, and the suitability of applicants is also qualified via the platform. The platforms can also link different businesses to different groups of peers for better matching and also assess and propose the lending rate.
The application process may remind you initially of the process for a regular bank business loan. However, you will soon find out that there are fewer hoops to jump through, and the processing time is much faster. In addition, the terms are usually far less ominous than that of a bank as the funding is coming from people, not from a massive financing machine.
Some P2P groups offer loan amounts from ten thousand pounds up to five hundred thousand pounds with interest rates ranging from just below 3% to just over 12%.
Your repayment amounts will be split, at the receiving end, between reimbursing the peer pool’s capital resources and interest dividends to the peers.
If your business has no, or very limited, trading history, then the pool of peers might request a surety or the security of an asset. As we said earlier, don’t put up your family home because losing a business and home all at once is a nightmare that nobody wants.
Benefits of peer to peer lending
The most attractive aspect of peer to peer funding for entrepreneurs is that you can get an answer in less than a minute. You don’t have to waste precious business weeks in limbo wondering whether you will get financing, while great deals and opportunities pass you by. The application process is easy, swift and user-friendly. Some P2P groups guarantee funding in your account within the same day if you are approved.
P2P is not a hippy-dippy approach to financing ‒ it does come with standard business loan legal ramifications. If you renege on repayments or fall behind, your credit rating might be affected. If you want to settle the loan earlier, you will probably need to pay a settlement fee for loss of interest earnings for the pool of peers.
On the flip side of the coin, it would be prudent for you to research the shortlisted P2P partners you are looking at. Do they all have a reputable history as lenders? Is the source of their capital ethical? The P2P sector is filling up fast with cash-flush entrepreneurs so don’t be blinded by “dollar signs”. Ensure that the money lent to you will not be frozen nor tied back to some brand-damaging human rights issue.
Bootstrapping is a tough but common way of starting a business. If handled correctly and supported with careful planning, your conservative financial start can reap big rewards for you.
Bootstrapping means you launch and grow your business with blood, sweat and tears ‒ no third party financing is involved, only your own savings and pump any profits back into the business.
This business finance management ethos, when done well, breeds some very good financial habits and results in some wise, strategic moves. Many successful market leaders still have a healthy dose of “lingering bootstrap” mentality, which keeps them financially on their toes and strategically alert.
Most people do not know that some of the famous bootstrapped brands are Apple, Microsoft, Sun Systems, Dell, Coca-cola, Hewlett-Packard, Vitaminwater, KFC, Craigslist and MailChimp.
Bootstrapping needs patience, tenacity and lots and lots of very hard work, late nights and a lack of social life. Budgets must be tight and strictly followed, and consistent cash flow is vital.
For this, you are rewarded with full control over all business decisions, not tap-dancing to the tune of investors and no panic attacks about a looming repayment date during an unseasonally slow month.
It takes real entrepreneurial brawn but gives you a huge sense of satisfaction as you watch your brainchild grow purely based on its own merits, and your concept remains undiluted by the goals of financiers.
A lack of cash flow is a common business killer, so you will need to strategise regularly with your accountant about the ongoing viability of refusing outside investment.
During all the hard work and late nights, you will also be required to remain creative, resourceful, forward-thinking, customer-focused, passionate and work magic with finances.
There are many different ways to get funding for your business that suits you personally as well as your business model. Remember, however, to run your decision past your accountant as they will make sure that you start your financial journey from a solid footing.