The number of alternative funding options available to growing businesses is incredibly exciting. The alternative finance sector is rapidly evolving and for many entrepreneurs it can be hard to keep up with the pace of change and stay up-to-date with the best funding solutions for start-ups and growing companies.
With that in mind, we thought it best to write an article that lists many of the best alternative funding sources available to London’s NGCs today.
- Debt Crowdfunding
Commonly referred to as crowd lending, debt-based crowdfunding is similar to securing a loan from a high street bank in many ways, but often with much lower interest rates. A debt crowdfunding investor will stump up capital to a growing business, receiving shares for their investment.
The medium to long-term expectation is that the investor will not only receive dividends on profit shares, they may be able to sell their shares on for a profit if the business continues to grow. Meanwhile the business agrees to repay the initial loan over a fixed repayment term.
- Micro Loans
Start-ups and small businesses can avail themselves of micro-lenders and non-profit organisations that offer short-term micro loans to be repaid over a maximum period of around five years. The term micro dictates that the size of the loans also tend to be no greater than £10-£15,000.
Crowdfunding portals such as Funding Circle and Crowdcube offer a wealth of lending opportunities for start-ups and entrepreneurs. They can pitch on crowdfunding websites for a sizeable investment figure in their business model, with the ability for multiple investors to invest small amounts towards achieving that final total.
Unlike traditional forms of business finance, crowdfunding money is not directly repaid. Start-ups may instead opt to offer their investors some form of service in return for their financial support, such as a free sample of their product.
- Angel Networks
One of the most typical forms of alternative finance for start-ups and early-stage companies is via a group of ‘business angels’. These tend to feature highly-successful, self-made entrepreneurs who look to acquire shares in potentially lucrative early-stage companies using their own funds.
- Private Equity
More common with established companies, private equity investors can help businesses accelerate their growth by expanding into new markets or purchasing competitors to consolidate their position within a sector. A typical private equity deal may lead to a complete buy-out of the company’s senior management, while some owner-managers may prefer to stay in charge whilst realising a small percentage of their equity value.
- Public Equity
Companies are within their rights to float themselves on the public stock markets like the London Stock Exchange, offering shares in exchange for investment. For companies seeking to raise over £5,000,000 through a public share issue, they must release a full prospectus – a legal documentation compliant with the EU Prospectus Directive.
- Asset Finance
Start-ups or entrepreneurs seeking expensive equipment to help get their business ideas off the ground can look to asset finance – the ability to acquire the tools needed, such as machinery or IT equipment, without having to pay the full cost up front. Instead, assets are paid for over the lifetime of the lease in instalments.
- Company Credit Cards
Some entrepreneurs and start-ups choose to apply for short-term credit cards, allowing them to borrow money interest-free for up to 56 days, provided that the card balance is cleared in full each month.
- Commercial Mortgages
For start-ups seeking funds to acquire their own premises, a commercial mortgage is possible, varying from less than three years to more than 20, depending on the terms of the agreement. The mortgage is secured on the property being financed via an initial charge.
- Early Stage and Development Loans
Businesses that are still at a relatively young stage in their development but trading profitably and don’t have enough assets of their own to secure a traditional loan can attempt to raise development funding from potential lenders. Though, be prepared for higher interest rates as the loan is unsecured against any type of asset.
- Invoice Factoring
Businesses can ease the strain on their cash flow by realising funds from unpaid invoices of your customers. Invoice factoring is a suitable source of funding for those who don’t have in-house accounting or finance departments and don’t have the time to be chasing late payments.
An issue of a mini-bond enables a growing company to raise debt funding from a group of individual lenders, usually their customers. The majority of mini-bond issues are unsecured loans and must be held for their full term or until the borrower opts to redeem it.
- P2P Loans
Peer-to-peer (P2P) platforms that arrange loans from groups of individuals or organisations to entrepreneurs looking to grow.
- Pension Backed Loans
The ability to receive a commercial loan against a business owner’s pension pot.
- Single Invoice Finance
Entrepreneurs can raise finance against any individual invoice, rather than financing their entire sales ledger, as with invoice factoring. This specialist form of finance is usually offered in an online auction format, where investors bid to take the invoice on.
Did you know? As a Workspace customer, you have free access to our partners, Informed Funding? They are an online and offline information resource designed to help NGCs identify the range of alternative finance options available to them. You can arrange a free one-to-one consultation with an Informed Funding professional, as well as secure a place at one of the many finance seminars and workshops held across London.