Guide to alternative finance for small businesses

VV 15 Sept a

Getting finance as a small business isn’t as easy as it once was, with many firms looking to alternative sources of investment. We take a look at some of the options.

A quarter of small businesses are struggling to gain access to working capital, with funding growth their biggest business challenge, a report from software company Sage found.

And while bank loans were popular in the past, in recent years small firms have struggled to have their applications accepted. Over half of all small businesses had a loan declined between 2012 and 2013, claims Sage, and 60% say it’s harder now to get credit than 5 years ago.

There are other options though. Here are a few:

Angel investors
Think Dragon’s Den but without the sweaty pitching session. Angel investors are usually business people who have already succeeded. Not only will they provide cash, but they could also offer guidance, contacts and more.

What they are looking for is a new challenge and a sound business model that will help them make money.

But they will be looking for a quick and profitable return on their investment.

Government schemes
To help businesses in the wake of the financial crisis a number of Government schemes were launched to help small businesses secure financing.

The Government website currently lists over 500 of these schemes – some directly funded by the Government, others by regional bodies or enterprise agencies.

They can offer funding for everything from staff training to research and development.  The Regional Growth Fund is a good place to start, though competition is fierce.

While sites like Kickstarter used to be focussed on smaller companies and arts projects, they’ve expanded recently into legitimate business finance.

There are now a number of websites that allow anyone to invest in your company. For companies this can be useful as it means you’re getting lots of small investors with little say in how the company is run, instead of one larger shareholder who might want to add their opinion to the business plan.

VV 15 Sept 2a

Venture capital
Private equity and venture capital firms seek out potentially high growth companies. Ones that with a bit of financial backing could grow quickly and provide the investors a quick return on their money.

The investment tends to be short term, around 5-10 years, with the investors selling their shares after that time.

Pension-led funding
With pensions seen by some to be under-performing, some small firm owners feel the money would be better invested in their business.

Business owners can apply to their pension provider and borrow against the value of their pension, paying interest on the loan over a period, usually not more than 5 years.

Another way to do it is to have your pension firm buy the intellectual property rights from the business – such as domain names and trademarks – and leasing them back to the company. This gives you a lump sum of cash while you pay it back via the leasing arrangement.

Credit unions
Credit unions have for some years been offering individuals low interest loans, but legislation introduced in 2012 allows them to offer similar loans to businesses.

The funding is only available to people who are corporate members of the Credit Union, and there are still some criteria that must be met for the lending.

Posted by The Secret Businessman