One of the most important elements of launching a business is securing the finance to make it a reality. For every enterprise, finding funding that suits your needs and works for your unique situation is a challenge. However, when you are setting up a high-risk venture, it becomes even hard to find an appropriate financial solution.
Many sources of funding are averse to risk – mainly traditional lenders, such as banks and commercial institutions. If your business idea is seen as ‘risky’, you need to identify lenders who are open to you – which means going against the grain and seeking alternative forms of finance.
In this guide, we have outlined our five top ways to funding a high-risk business idea, so that you can access the capital you need to launch your company and avoid financial rejection.
Asset-based finance
If you are a high-risk business, the reason that lenders are less willing to provide you with loans is that there’s a chance that you may not be able to repay the loan, leaving the lender out of pocket. So, you need to find a way to show lenders that you will be able to repay them, even if unfavourable financial circumstances come your way. This is where asset-based finance comes in.
With asset-based finance, you use assets you own – such as machinery, equipment, property and so on – as collateral. This means that, if you fail to meet repayments, the lender can take over these goods to recover the value of the loan.
Asset-based finance is beneficial in the sense that it allows you to secure more significant sums of funding while reassuring the lender. However, if you do find yourself in a poor financial situation where you cannot repay a loan, it is unlikely to be ideal to have your goods seized. Equally, you will need to own high-value assets for them to count as collateral.
Regardless of your stance on asset-based finance, the likelihood is that you will need it or another form of security if you are considered as ‘risky’ and are seeking a loan. Alternatively, having assets in place could also help you improve cashflow via sale and leaseback of your equipment.
Guarantor finance
If you do not have enough assets to secure a loan, an alternative is guarantor finance. With guarantor finance, someone – such as a stakeholder for your business – agrees to guarantee your loan. If you fail to keep up with repayments, this individual will then cover the balance leftover. So, this reassures the lender that they will get their money back in one form or another.
The biggest challenge with guarantor finance is finding someone willing to guarantee your loan. Depend on the size of the loan, having to cover the balance could put a strain on their personal finances. Personal guarantee insurance can mitigate the risk for company directors acting as guarantors.
While it may not be ideal for guarantors, this form of finance is useful for enterprises who need to access funding, but who do not have assets in place to use as security. As a result, even ‘high risk’ ventures can obtain the funding they need.
Investors
While traditional lenders tend to be risk-averse, it is possible to find investors who are more likely to take a gamble on a high-risk enterprise – such as through angel investment.
Angel investors are high net-worth individuals, usually with experience in business and possibly your industry, who are looking to work with companies in exchange for shares. Their primary goal will be getting a healthy return on investment. So, if you are able to convince them of this, they will likely be willing to give you money – even if other lenders have rejected you in the past.
The first step to seeking investment is finding an investor who is a match for your business: this usually means networking or utilising online platforms. Once you have found someone who could be interested in your idea, you will need to be able to pitch to them with a bulletproof plan that effectively demonstrates the value you can provide and their returns they could receive.
The added benefit of investment is that often these individuals have shareable knowledge that could support you: not just in terms of finance, but also by connecting you to other relevant people and helping you in the running of your enterprise.
However, it does mean offering shares in your company to potentially hands-on shareholders who may wish to have an opinion on any strategies or measures you introduce. So, you should bear this in mind.
Alternative lenders
In today’s world, the lender market is diverse. This is great for many reasons. Firstly, it keeps competition healthy, which drives down interest rates and encourages different providers to ‘better’ their offers. Secondly, it means that individual businesses can find solutions tailored to them, and this includes those deemed high-risk by standard lenders.
Alternative finance has grown in popularity in recent years. Often, these alternative lenders have access to a range of offers and providers that the likes of banks would not, meaning it’s possible to get terms for your circumstances. These lenders also tend to be less risk-averse, meaning more companies are accepted for the funding they need.
Other advantages of using an alternative lender are that the application process tends to be digital and therefore faster, they are less fixated on assets as collateral, and they have increased flexibility.
However, as with any form of finance, the key is finding the right provider for you – which means shopping around. Alternative lenders will be found all over the internet, but it’s essential to make sure any you commit to is reputable and trustworthy.
Using a trusted broker is therefore worthwhile when seeking alternative finance, as they will be able to put you in touch with a host of different providers. A good financial broker will also talk you through the options and help you to determine which is best for you.
Venture capitalists
Venture capital specialises in raising a mix of equity and debt for higher risk ventures, so it’s an option well worth considering if you have high growth expectations.
A venture capitalist (VC) firm will work with and generate equity for your enterprise, with the objective of getting a high return on investment. They provide support as well as funding, helping to get your business into good shape so that profit is maximised when they exit. However, those firms receiving VC funding are few and far between and it will be all about the pitch you make – the strength of your management team, financial projections, your idea and the problem it solves, and so on.
VC is not a short-term solution. They tend to be present from five to eight years, during which time they will take an active role. So, you need to be prepared to give them this control in exchange for capital. However, their desire for strong ROI means they will provide a great deal of help in achieving your enterprise’s success, as well as keep you focused on the numbers.
It’s also important to note that VC won’t suit everyone. It tends to be aimed at new entrepreneurial endeavours, early-stage and high growth firms.
Get advice
Identifying the best solution for your funding needs can be tricky, particularly if you haven’t utilised business finance before. When the term ‘high risk’ is involved, it may feel like the market has narrowed.
Fortunately, there are now more solutions than ever available for enterprise, including those deemed risky. The key is knowing where to look for it and how to apply.
At Pegasus Funding, we offer support in securing finance based on your unique requirements. We have access to a variety of contacts providing a range of funding solutions, so we can point you in the right direction and work with you to determine the best option.
We will also help you through the application process, so your chances of being accepted are even better.