10 ways to fund your business without a bank loan
How to get around the credit impasse
With bank lending figures continuing to fall, thousands of entrepreneurs are looking for alternative sources of funding to get their business off the ground. If you’re one such firm, this article provides a comprehensive guide to the tools and options at your disposal.
Bank overdrafts. For companies with fluctuating income, a bank overdraft can provide quick, flexible cashflow. The idea is simple: you dip into the overdraft in the leaner months, and come back out when the business picks up.
Most major banks charge interest only on the amount you overdraw, and many offer tailored packages for young businesses. For example, NatWest provides overdrafts up to £500, free of set-up fees, for start-up firms. However rates of interest on bank overdrafts are usually charged above base rates, and in most cases the overdraft amount is repayable on demand.
Under the terms of the agreement, the financier purchases a fixed percentage of your future credit/debit card transactions at a discount, and then advances the cash into your bank account, usually within 10 working days. Repayments will be scheduled at a pre-agreed percentage of every transaction – usually between 10 and 20%.
With a cash advance, you can secure up to £100,000 without the burden of collateral or fixed monthly repayments. But you may have to meet a rigorous set of conditions; for example Business Cash Advance insists all clients must have been in business for at least a year, with a minimum monthly turnover of £3,500 and the ability to process credit and debit card transactions.
Asset-based lending. An asset-based loan works the same way as a mortgage. You borrow money against an existing possession, and, if you can’t meet your obligations, the asset is repossessed. Assets which can be used as collateral include property and premises, accounts receivable, inventory and equipment.
Although interest rates are often punitive, asset-based finance can be extremely useful for a company desperate for cash, or a business backed by valuable property which has yet to make major profits – such as a hotel or plant hire specialist.
Factoring. The factoring process allows you to release the money tied up in unpaid invoices, and removes much of the burden of debt management. When you engage a factor, they will take control of your invoices and assume responsibility for processing them. You will be able to draw funds as soon as the invoice has been approved – before the money actually comes in.
Factoring can speed up cashflow and free up the time spent chasing bad debts, but there are drawbacks. A factor will impose a charge on each invoice, so your profit margins will be reduced, and it can be difficult to sever a contract with a factoring firm, because you have to compensate them for all outstanding invoices before you can formally part company.
One alternative, which could be more cost-effective, is MarketInvoice, an online marketplace which allows you to auction your invoice to a community of investors. You receive payment straight away and the investor will receive a profit when the payment finally comes in.
Angel investors. If you manage to impress a business angel, they may provide investment in return for an equity stake. Most angels are seasoned entrepreneurs themselves, so they know what you’re going through and they’re likely to be patient.
Furthermore, the process of finding and enticing an angel is far less daunting than you might think. Companies such as Beer & Partners can put you in touch with hundreds of angel investors, and provide advice to hone your pitch. If you can put together a tight pitch with realistic growth projections, and are prepared to give up a share of your business, this could be the route for you.
Crowdfunding. Crowdfunding is, essentially, an extension of the charity sponsorship page in the business world. People come together, on crowdfunding sites, to pool money towards a particular venture or idea – it could be ten people putting in £500 each, or 3,000 people each giving £1.
Donors or investors on crowdfunding sites, such as Kickstarter or Crowdcube, are typically private individuals providing small sums, so they’re unlikely to give you the sort of grilling, and rigorous conditions, an angel investor would. You can also scope out the popularity of your idea via a crowdfunding site, and get some crucial word-of-mouth marketing going.
If you’re interested in raising finance using crowdfunding take a look at Startups’ crowdfunding platform. We’ve partnered with Crowdcube to offer businesses a new way to raise seed or growth capital. For more information, read our guide on how crowdfunding works.
Peer-to-peer loans. A peer-to-peer exchange site, such as Zopa or Funding Circle, will put you in touch with private lenders, and create a personal relationship between you and the lender – fostering trust and patience.
A number of companies are now well-established in this space, and several offer generous terms. Indeed Zopa waives all fees for loan applications, reduces interest rates for borrowers who make early repayments, and adds only a one-off fee of £130 to the cost of the loan.
Micro-loans. If you only need a very small amount of money, you should think about a micro loan, which is tailored to your circumstances and can be used alongside funding from other sources.
A number of companies in the UK offer micro loans; for example Finance Wales offers funding from £5,000 to £25,000, with generous repayment terms ranging from one to five years.
Community schemes. A plethora of community development finance initiatives, or CDFIs, have been set up around the country to help individuals, and businesses, denied credit by banks and lending companies.
CDFIs provide help with everything from bridging loans and working capital to funds for property and equipment purchase, but their terms are usually restrictive; you usually have to be either a micro-business or a social enterprise, and be based in a disadvantaged area to qualify.
Family loans. If you want to keep things ultra-simple, a supportive family, with money to spare, can provide a fair, willing and reliable source of loan funding. Relatives and loved ones are more likely to trust you with their money than an outsider, and they will probably demand lower interest and fewer incentives than a commercial organisation.
Any finance model or provider should be researched thoroughly before you make any commitments, to ensure this is the best solution for your business. You will find more information on some of these finance options in our Business Financing section. We would also recommend researching specific providers or funding platforms online and speaking to other businesses which have used them.