Funding for small businesses: three places you haven’t tried

Thanks to the rise of alternative financing, the options for funding your business are greater than ever

Growth and strategy

10 August 2016

From foundation to expansion, the lifeblood of your business is its cash flow. The good news from the British Business Bank is that lending to small businesses increased in 2015.

However, the majority of the increase came through alternative lenders, which account for less than 20% of the lending market. So, it's never been more important to consider new sources of finance.

Peer-to-peer lenders

The rise of peer-to-peer lenders like Funding Circle and RateSetter grew out of the recession. Start-up lenders decided they could pool savers' finances and offer small businesses loans with better interest rates.

Like a regular loan there are financial prerequisites, but the attraction is the availability of relatively low interest unsecured loans, the flexibility in the length of loan repayment terms and the speed with which the cash is released.

Crowdfunding

Like peer-to-peer lending, crowdfunding relies on a large number of investors providing capital via an online platform. The key difference is what you need to do for the money, and what your investors expect in return.

While loans concern your financial history, credit score and the risk those represent, crowdfunding is all about your message. That's how compelling your product is, and how convincing your business plan is. Once the investors are on board, they'll expect either products delivered to a high standard or a share of your business.

Angel investors

Both investors and venture capital funds provide funding in exchange for a share of your business, often providing additional support like useful contacts, advice and even office space. This is known as equity finance.

According to an ICAS survey, however, many small businesses remain suspicious of investors encroaching on their freedom. A 2015 report by British Business Bank found that just 1% of small businesses had taken advantage of equity finance in the preceding three years. While losing control is a valid concern, expert support could be just as important as cash flow when it comes to business success – so it's worth weighing up.

Whichever path you choose, it's important to remember that although funding may be essential, the terms on which you access it will affect how your business grows.