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.