Most entrepreneurs are aware of the relentless battle that can take place when trying to secure commercial finance. Even after they have taken the plunge – with a genius concept, ready to scale-up and grow – accessing the necessary finance can be one hurdle too many.
Most start-ups and small businesses go on to find that there is also a reluctance from high-street lenders to fund their ambition – leaving them with limited offers of finance. And, at this stage, the chances are that you will have already used up all reserves as well as support from family and friends. The prospect of approaching angel investors can be a daunting one too. It is, after all, a time-consuming challenge.
Depending upon the level of risk you are willing to take, the assets you have and the amount you are looking to borrow, there are still some options available…
- Secured and unsecured loans
- Venture capital
- Private equity
- Peer-to-peer finance (P2P)
…to name a few.
A combination of both debt and equity solutions, you’ll either need to sign up to (sometimes high) interest rates or to relinquishing shares in your business. And the choice often isn’t yours.
But, if you have a preference, then crowdfunding or peer-to-peer finance could be for you. They both deliver great early-stage funding for small businesses, with the benefit that you can choose P2P for debt or crowdfunding for equity.
The concept of lending via online platforms raises finance by connecting lenders with borrowers based on personal interest, specific criteria or automatic matching. You generally pitch your idea via a funding platform with the intention that people will take an interest in your business or project and want to be a part of it.
But the question is, debt or equity?
P2P lending is a good plan if the loan being sought is for a single purpose over a fixed period of time. Even better if the company is in a strong cashflow position and has assets to secure against the finance. Asset-backed debt will always help to keep the interest rate lower and a good cash flow reassures investors that late payments are unlikely. Conversely, it’s not an ideal option if you feel the regular repayments will be too much of a burden on your business.
But, if you’re struggling with the concept of ‘debt’ and monthly repayments are a far-flung reality, then you can consider equity crowdfunding.
This involves asking a large number of people to pledge small amounts of money to help you reach your funding total. And contrary to many beliefs, this is not just an option in sheer desperation, it can be a sound strategic move.
You basically agree to give up shares in your business in return for investment; an option with many advantages but still a worry to many early stage businesses that don’t yet hold much value.
But if you’ve already raised a large amount of debt, this is a great way to not only obtain additional funds but also maintain a healthy debt-to-equity ratio; a balance sheet tick for sure. And for investors, the rate of return could be higher than other investment options. The main risk to them being that it could take a while for the company’s shares to increase but in the long-run, they will either receive dividends, profits, or shares.
There is also reward crowdfunding. Sometimes people are happy to invest simply because they have an affiliation with your business, or they might just like your idea; they’re not in it for the financial gain. Offering rewards is a great way to show your appreciation and it might even increase the amount of money a supporter will pledge, as well as generating excitement around your project.
Rewards are often successful in securing early support and work to get your crowd motivated. Try exclusive promotional discounts, experience days or tickets to events; the key is that they’re not widely available, so start by offering a limited number.
And finally, it’s worth mentioning that P2P and crowdfunding is about more than just monetary gain. By appearing on a large platform, you have the opportunity to engage with a big audience which will raise awareness and create interest in your product or service. It can also give you an idea of the expected demand for your product, as well as providing a channel for feedback. The crowd can help to highlight any strengths or weaknesses your business may have and also provide the expertise to help.
The positive impact of this increased awareness is benefits such as driving traffic to your website or improving your social media following. The more people that know about you the better. You never know, they may be a potential investor.
If you think crowdfunding is an option for you, or you’d simply like to discuss how we could help you to reach your goals in securing the right finance to scale-up, speak to one of our advisers.