Finance · 25 October 2016

The alternative funding options you might not know about as a small business

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 fundingoptions 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 fundingterms 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.



Bivek Sharma has been a partner with KPMG for over ten years, specialising in accounting, tax and software. He started the Small Business Accounting division over two years ago with a goal to transform accounting services for small businesses. The team works with a huge variety of industry sectors and companies including coffee shops, technology companies, manufacturers, pubs, restaurants and retailers.

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