Funding for growth is great but you need to be eyes open!
It’s fair to say that the lifecycle of your average business, whether it’s a start-up, a micro business or a more established SME, will not be without the need for additional funding at some point.
This is not to say that to seek funding is a bad thing. More often than not, the benefits received can be the making of a business – providing the additional security it requires to grow. But sourcing the funding can be the thorn in a business' side; especially when there are so many options out there.
Your real focus is the day-to-day running of your business without the additional pressure of weighing up the pros and cons of equity, debt, crowd-funding and angels. Who knew there were so many people interested in investing in your business?
But nobody gives something for nothing when it comes to their own money. And, as the person taking responsibility for someone else’s money, you need to be aware of how you can secure the best finance.
You may be sourcing a cash injection to simply boost your cashflow or perhaps you have great plans that you need to research and develop? You may just need to stay afloat or maybe your product is ready to market?
Whatever your need, you need to know which type of finance is going to be right for your business and, more crucially, what are the chances of you successfully securing the funding you require?
Since the financial crisis in 2008, high street banks have been more than risk averse when it comes to providing funding for small businesses. Traditionally, they were the first port of call for many but, with only unsophisticated financial information to hand, SMEs are finding they are being declined for loan requests. In the main, this is because they are unable to justify a sustainable income stream.
Cue online lending, peer-to-peer finance (P2P), crowd funding and business angels - otherwise known as alternative financing. This is the term given to the new technology-led approach to funding and is a perfect match for many small businesses. The key benefit is the outstanding level of choice and flexibility never before seen in the more traditional approaches to financing. Small businesses are becoming more educated and finding the confidence to plan for growth.
So with this wave of innovation, the dilemma for small businesses is not necessarily "will I get the finance?" but more "where shall I get the finance from?".
Online lending is a popular alternative to traditional business loans because it is so easily accessible. In most cases, the application can be completed within the hour and the funds available to you within a matter of days. This obvious advantage of ease and speed often outweighs the disadvantage of higher interest rates.
However, you should be aware of this when securing your online loan to ensure the monthly repayments are feasible for your business, not just now, but in the months ahead. Small business owners are often guilty of not doing enough research and will settle on a source of funding without realising the pitfalls. The desire to obtain the finance often takes over the desire to research the funding option that is most suited to their needs.
Similar to online lending, P2P finance and crowdfunding are easy to access, but often with the added benefits of more attractive interest rates and repayment terms.
P2P lending is also known as ‘social lending’ or ‘debt crowdfunding’ and openly allows individuals to lend to one another in return for repayment with interest. And it’s all facilitated via the internet. So instead of the traditional financing concept of borrowing a large amount of money from one lender, you are now seeking smaller amounts of finance from lots of people located anywhere around the world.
But this doesn’t mean it’s straightforward. Often the journey to get there can be labour intensive and time-consuming. There is a lot of work involved in preparing to obtain the finance, especially if the funding is sought through auction or on-line bidding. Furthermore, and by its very nature, the P2P community are very active in on-line forums and eager to share information about recent finance experiences. Are you really ready for your money matters to go public?
However, there is reassurance in lenders and borrowers knowing who they are lending money to and borrowing from. And it can be a great network of trust...
Business angels work in much the same way, but with a relationship that is deemed to be more personal. A business angel is a high net worth individual making their own decision to invest their disposable finance in a cause worthy to them. Angel investing is, however, a form of equity finance and so, in exchange, you will be sacrificing equity in your business.
Business angels are just one source of equity finance. Family and friends, venture capitalists, special equity funds and flotation are just some of the others. In most cases, the total funds required will be raised from more than one source.
For many small businesses, these alternative sources of funding must seem like a godsend; the gates to accessing funds have been opened. However, while alternative funding is easy to comprehend, the risks are often less understood.
The best solution to avoiding the pitfalls inherent in rushing into a peer-to-peer loan or a crowdfunded equity finance deal is to talk to a professional broker who understands the markets. They know the sources of funding and can make sure that businesses get the right funding at the right terms to suit their needs.
For more information on alternative debt and equity funding call Pegasus Funding Resources today on 0207 327 0567.