Finding finance to grow a startup can be one of the hardest things a business owner has to face, and there are funding pitfalls. For many, it is not as simple as asking the bank manager for a loan and skipping off into the sunset with pockets full of cash.
But just because a business gets rejected for a loan doesn’t mean it isn’t viable – there are any number of reasons a bank might not want to get involved.
“Banks have very strict rules and they rarely assess applicants’ entrepreneurial drive and capacity. Instead, they look mainly at the business plan. Different banks will have different levels of comfort while assessing the risk factor, but most banks will not give a loan to startup companies because of the risk that is involved,” explained Angelika Burawska, chief operating officer at Startup Funding Club.
“Businesses might be turned down because they are too young, because of a founder’s personal past, because the financial model and forecasts are not satisfactory or because the new business works in new and unproven technologies.”
With this in mind, it’s hardly surprising that small business owners are increasingly turning towards alternative finance. However, while this is great news in many ways, it still pays to be wary of potential red flags.
We rounded up a group of finance experts and asked each of them the same questions – what are the disadvantages to alternative finance, and what pitfalls should a business owner be looking out for? Here’s what they had to say:
Richard Spielbichler, ABL director North West, Independent Growth Finance
“The main pitfall to consider is whether the business has a USP that will protect their position in the market. Many businesses suffer from ‘me too’ syndrome, where their USP is very similar to an existing organisation.”
Chris Maule, CEO, UK Bond Network
“Pitfalls and unexpected obstacles are part and parcel of running a small business, but preparation and contingency planning can mitigate these risks considerably. Firstly, take stock of your company’s performance and plan the timing of your next injection of capital.
“Secondly, ensure that you are adequately prepared to seek and ultimately repay that capital, define the type of finance that you need and speak to a range of investors or providers. Then, carefully select the most suitable outfit to move forward with.”
Angelika Burawska, COO, Startup Funding Club
“It depends on the type of financing. In the case of loans and various types of trade finance, the main pitfalls lie in payment terms, such as how much and when, late payment fees and what happens if a company fails to pay.
“In the case of equity funding, businesses have to pay attention to the valuation they raise which may be too high or too low; and the control rights they give to investors.”
John Bevan, MD, Secure Trust Bank Commercial Finance
“Headline rates can often draw businesses in without understanding both the hard-hidden costs and softer intangible costs of financing.
“It is important for businesses to understand exactly what they get for their money in terms of flexibility, support and access to decision makers.”
In summary, research the kind of finance you are looking to take out, and look at all the figures – and don’t be suckered by a headline rate. Look at re-payment terms, and make sure it is the right kind of funding for your business in the long-term.
Make sure you know your business inside out – learn all the facts and figures so your pitch goes off without a hitch, and have a detailed business plan to hand.
Research, research, research – and if you need a helping hand, there are plenty of places you can go. For example, there are price comparison sites available such as Funding Options and Alternative Business Funding (ABF).