Raising
investment to kick-start or expand your business is often a time-consuming
process. You may wish to secure a bank loan, however, this route, although
instinctively most obvious and attractive, may eventually turn out to be not
easily available and rather troublesome. When considering different financing
opportunities, it is worth bearing in mind that various alternative funding
options are available and assess them against your particular circumstances and
the objectives of your business. This article will discuss some of such
alternatives, addressing their main qualities. Ultimately, it is in your
capacity to choose the financing route most suitable to your business, but
undergoing a decision-making process with an access to a wide pool of
information can only facilitate a more informed decision.
Peer-to-Peer
Business Loans
Also
known as loan crowdfunding, peer-to-peer business lending is an accessible and
relatively quick method of acquiring funds for your business. The primary
advantage of using the services of P2P lending is that it is investors using a
particular platform who decide whether your firm’s funding requirements are
worth their interest. The context in which the lending takes place is one of
people-driven finance, offering a fresh and increasingly business-friendly
vehicle in the face of crumbling access to bank business loans. Inevitably, there
are initial vetting and checking procedures that each registering business
seeking funding needs to pass before being approved and put before the network
of investors, however, once these are satisfied, the opportunities are vast.
Additionally, the sole fact of your business receiving funding from a diverse
crowd of investors serves as validation to your business idea. This
confrontation, whether it is your first step into the business world or an idea
for expansion, is perhaps not a guarantee of future success, but it definitely is a useful reality-check.
In
the United Kingdom, one of the platforms that offer P2P lending is Funding Tree.
It is regulated by the Financial Conduct Authority and there is no fee to join.
Furthermore, unless a project meets 90% of its target, there is equally no fee
payable. After you go through the initial checks, you can submit your pitch.
Conveniently, the legal work is handled by Funding Tree and you are only asked
to approve the legal documents sent your way after submission of the pitch.
Once this is completed, your pitch, supplemented with the pre-approved legal
paperwork, goes live. Fees range between 2% of the amount in question for 1-12
month loans to 3.75% for 37-60 month loans. If you intend to take a loan for a
larger asset purchase, be prepared to pay 4.5% for a 12-36 month loan and 3.75%
for a 37-60 month loan. It is worth noting that Funding Tree also offers equity
crowdfunding, where investors contribute a certain amount of money to the
business seeking funding in return for an equity share in such business. In
that case, the fee applied is 4.5% of the aggregate sum raised.
Reward-based
Crowdfunding
Another
way to raise finance to fund your business idea is to make use of reward-based
crowdfunding platforms. In this structure, in return for backing a project,
backers receive a particular reward contingent upon the sum they commit with
the appropriate rewards being set out at the beginning by the business
submitting the project. Reward-based crowdfunding is an immensely efficient way
of testing your product; without incurring debt and at negligible cost, it will
allow you to see whether your business idea is capable of receiving the
response you anticipate. Furthermore, provided that the project is successful,
there is a lot to gain by word of mouth-marketing by satisfied customers and a
clear opportunity to develop a loyal customer base. Often, funded businesses
come back to crowdfunding platforms with new ideas, capitalising on the
popularity among initial backers. Nonetheless, it is perhaps worth to mention
that success in reward-based crowdfunding is largely dependent on how
eye-catching your product description is and whether you can tell the story of
your product in a sufficiently compelling manner. Not too infrequently, the
quality of marketing materials in successful projects outweighs the quality of
the product itself. Additionally, new backers are attracted by the traction of
your project. Therefore, if you choose to follow the route of reward-based
crowdfunding, it is crucial that you begin with creating an initial network of
backers among family and friends, asking for further referrals.
Kickstarter
has an unbeatable recognition as a crowdfunding site and thus allows for higher
visibility of your project and the necessary traction you would want it to
gain. The site, however, is aimed at creative projects and the approval is
subject to a screening process. With respect to costs, Kickstarter charges 5%
of all funds raised, with funds not collected from backers if the goal is not
met. Additionally, there is a further 3-5% fee on transactions.
Indiegogo
offers larger flexibility thank Kickstarter and is a more accessible option.
There is no application process and, provided you choose flexible funding, you
can keep the funds raised even if you do not meet the goal set. The fees are 5%
of funds raised, with the transaction fees between 3-5%.
Angel
Investors and Venture Capital
Pitching
your business to an angel investor or a venture capital firm may be worth
taking into consideration if you are ready to accept investment in return for
equity. Angel investors will often be experienced entrepreneurs, willing to
invest personal funds both into early-stage start-ups and already established
businesses. Depending on the angel investor, they may be willing to add their
vital skills to operating your business. Equally, considering their, often
rich, entrepreneurial experience, angel investors could give you access to a
wide network of contacts, which, in the long term, may prove invaluable to your
business’s expansion. Making a good impression will inevitably depend on having
a good grasp of the market you are willing to enter and a solid business
strategy, supplemented by detailed projections. It is useful to consider such
platforms as Angel Investment Network
and Angels
Den, which facilitate matching promising
businesses with potential angel investors.
Venture
capital (VC) firms raise funds from a variety of sources, including pension
funds, corporations and wealthy individuals. The high-risk, high growth
principle that drives the venture capital industry means that the objectives
and priorities of VC firms and businesses they invest in are not always
necessarily aligned. Furthermore, venture capital firms will generally, in
addition to equity, require a seat on the managerial board and adopt a
‘hands-on’ approach to the business invested in. This, however, can have
positive consequences, especially as result of the VC firm contributing unique
expertise and exceptional managerial skills to the business. Nonetheless, VC
funding will usually not be available for firms with more limited investment
requirements. Balderton
Capital and EC1 Capital
are among the most prominent VC firms in the UK, with the latter holding open
office hours every few weeks, when you can pitch your idea or talk about your
company.
UK
Government support
Finance
and support offered by the government may serve as an interesting alternative
to all the previously discussed funding options. If you are not seeking for
financing at the level of or in excess of £1 million, you could consider
applying for support Regional
Growth Fund programmes. As result of such schemes,
run by local or national organisations, you could be eligible for a grant or
loan. In certain circumstances, and especially when rejected by high-street
loan providers, this could be a viable option to pursue funding. It is definitely
worth using the finance
and support finder to find funding
opportunities applicable to your business.
Miłosz Palej
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