18/06/2015

By Ed Molyneux, CEO and co-founder of FreeAgent

When it comes to financing a small business so it can grow and expand, it’s easy to see the attraction of a bank loan. Borrowing money from a source you’re familiar with can be a more comforting prospect than pitching to complete strangers; especially when you only need to worry about paying the loan (and the interest) back within an agreed timescale, rather than having to think about fiddly issues such as dividends or equity returns.

But unfortunately, for many small businesses, it’s not quite as easy as getting an appointment, making a quick pitch, showing your bank statements and walking away with the money you need. Banks tend to have very strict criteria in place for who they will lend money to and there are often too many hoops for small businesses to jump through in order to secure the funds they need: particularly if they are highly-innovative, high-growth ventures.

So what other avenues are available to you for funding a business if you want to avoid the bank loan route? Here I will examine a few of the alternative options for small business finance.

Angel investment

Angel investment can be a great method for financing a business with strong growth prospects, as potential investors will consider the future potential of your business rather than how it’s currently performing. In addition, angel investors tend to understand that many small business owners often have limited business experience, but they also know that these founders sometimes go on to build very successful companies.

However, that doesn’t make identifying investors and convincing them you have a strong business model any less of a daunting prospect. It’s a good idea to research thoroughly by looking at online communities, such as AngelList which can help you locate investors who are interested in your sort of business. Or, if you know any entrepreneurs who have already raised finance, ask them for feedback and see if they could give you a “warm” introduction to a friendly investor who may be interested in your business.

In my experience, I’ve found that investors are more likely to invest in a passionate entrepreneur who has a compelling prototype and some early customers than in a slick presentation – so don’t get bogged down with a barrage of Powerpoint slides. Just be yourself.

Crowdfunding

If you have a compelling product or service and you think you can highlight the value and potential of your business to a wider audience, crowdfunding could be a great avenue for you to explore for finance.

If you’re an early stage business still developing ideas for your full product range, you may want to look at a platform like Kickstarter, where you provide incentives in return for investment (e.g., offering a free product in exchange for a minimum donation). But larger businesses looking for wider growth can benefit from using equity crowdfunding platforms such as Seedrs to raise investment.

In the latter instance, you’ll offer up a percentage of equity in your company in exchange for shares which investors can purchase and, hopefully, receive liquidity for in the future. That might take the form of dividends once your business becomes profitable, the ability to sell shares if the business lists on the stock exchange or receiving a return on those shares in the event of a takeover or IPO.

Just remember to make your business case as compelling as possible and be prepared to answer some taxing questions about your business. Crowdfunding investors are no different to angel investors – they want to know that they are making a shrewd investment before they will give you their money!

Alternative lending

Banks aren’t the only places that will give you a loan. There are a myriad of organisations which provide finance for businesses, each with their own particular criteria for whom they will lend to, and the chances are that one of these will specialise in the kind of loan that’s right for your business.

For example, you may be able to secure finance through a lender that specialises in short-term loans based on your trading or your stock. Or perhaps your business might qualify for asset finance or re-finance, factoring or another kind of bespoke short term business loan.

Take the time to thoroughly research the market and see what options are available to you or, alternatively, check out a service like Funding Options which will do it for you. And remember not to be disheartened if you don’t succeed at the first hurdle – keep trying and always seek feedback to help you refine your pitch.

Small business grants

Although not necessarily a method for securing all of the money you’ll need to grow your business, it’s still a good idea to research through all of the potential grant schemes available in your region or industry, to see if you qualify for them. After all, any financial assistance is better than none!

If you’re hoping to grow your business and take on new staff, check whether there are any schemes that encourage businesses which create or safeguard jobs and apply for these. Alternatively, you could look for a scheme that provides funds for training new staff, or search for others that are designed to support businesses which are developing new products, processes and services.

If you’re unsure where to start your search, the UK Government website has a host of useful information to help you find potential grant and support schemes. Just remember that there will be many other businesses also applying for grants, so make sure your business pitch is as good as it possibly can be before you start making applications.