Alternative funding for small businesses

Alternative funding for small businesses

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Date21 Mar 2013
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Posted ByAdmin
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Bank lending to private companies in the UK has fallen every year since the financial crisis began in 2008, according to a new report.
Capital Requirements: Gold plate or lead weight? by Policy Exchange explained that there has been a staggering £57 billion drop in lending and it continued last year in spite of government efforts to trigger action with its Funding for Lending Scheme.

With businesses in much need of capital to establish themselves or expand, there is a growing fervor for alternative and less conventional means of funding.

Anil Stocker, co-founder of MarketInvoice, explained that alternative funding is a great fit for Britain’s start-ups.

“Small businesses, standing the most to gain from a revolution in finance because they are the worst-served under the current system, have welcomed the new players with open arms,” he told SmallBusiness.co.uk.

Crowdfunding

Crowdfunding is when a group of people work together to generate the finance for a project, business or start-up, typically through the internet. The money can be provided in exchange for shared equity or simply as a way of paying for something ahead of its completion so that the capital is available in the early stages.

The idea is that businesses present their ideas to the “crowds” on crowdfunding websites with an objective amount they want to generate for it to go ahead. If people like the concept, they can then pledge any amount towards the project, whether it’s a few pounds or a few thousand pounds.

If the company reaches its target within the specified amount of time it has, it receives all the money from its backers. If it is not met, then it receives nothing.

There is an array of crowdfunding websites on the internet suitable for start-ups and entrepreneurs, including Kickstarter, Seedrs, Spacehive and Unbound.

Seedrs, for example, is designed for start-ups and those investing are able to earn equity if the firm is sold, floats or pay dividends, while entrepreneurs can raise up to £150,000 in equity capital. It is not designed to be a one-way relationship, however, as investors are encouraged to support the start-up as well.

Peer-to-peer lending

Peer-to-peer lending is when loans are agreed from one “peer” to another, avoiding going through traditional intermediaries, such as banks. This is again typically done through websites that aim to link people with money to spare with those looking to borrow, including for business purposes.

They have been in operation in Britain for around a decade, with names such as Zopa, Ratesetter and Funding Circle all offering the lending services.

Websites such as these have lower operating costs than banks because they do not have to guarantee deposits or inherit the risk of the borrower. They work largely to introduce the two separate peers. As a result, they can offer cheaper loans.

There are a number of business success stories using peer-to-peer lending. The Cashmere Centre, for example, borrowed £40,000 through 507 investors in Funding Circle to create an e-commerce arm of its operation.

"The whole process with Funding Circle was very impressive and it was quicker, easier and cheaper than the high street banks,” said Jeff Pert, the company’s managing director.