Seven ways to fund your business without visiting a bank

Alternative forms of funding for entrepreneurs and small businesses are booming around the world.The UK is at the forefront of the quickly changing alternative financing landscape. 

Recent NESTA research shows the UK alternative finance market was estimated to be worth £1.74bn in 2014 and is projected to continue upwards. Here are seven options beyond a traditional bank to consider when looking for funding.

(1) Crowdfunding – Test your product and its reach

Online crowdfunding platforms are booming and shooting up all over the world. Industry estimates suggest that global crowdfunding reached close to $34.4bn in 2014. These platforms can differ greatly in method and audience and provide entrepreneurs with the opportunity to connect to thousands of potential investors in the form of loans, shares or even a donation. 

With a 25 per cent success rate, crowdfunding is the ultimate test of whether the public believes enough in a product to invest in it. However, these campaigns can take a great deal of preparation and time to execute and you may have to release a lot of information about your product at an early stage.

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(2) Informal investors and business angels – Receive investment and advice

Business angels often help businesses in the early stages of growth for a piece of equity. Most of these informal, mainly private, investors are entrepreneurs themselves and invest a portion of their own private capital into companies they are connected with or where they see potential. 

Besides funding, they often bring years of knowledge and experience to the table along with industry connections. In the best case, involvement can be very valuable but on the other side you could be pushed out of your own business as some investors will buy a large percentage of shares. 

These angels used to be found by good old-fashioned networking, today they can be found in the form of associations and groups that are easy to find online, much like crowdfunding platforms.

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(3) Online credit platforms – Take the paperwork out of lending

A booming trend in finance are the so-called balance-sheet lenders – many of these online credit platforms cater specifically to small businesses. Online lenders have grown about 175 per cent a year, compared to a decline of about three per cent in the traditional banking sector. 

Online lending platforms leverage big data to provide financing solutions for small businesses. Entrepreneurs can fill out their credit application online, upload their business data and often it is known within a day how much credit will be provided and at what cost. Nevertheless, just because the process is much faster than that of banks it does not mean your loan will be approved automatically. 

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(4) Credit unions – Coop for credit

A credit union is a cooperative, non-profit institution with several economic deposit funds in a member-owned space. It is lending by entrepreneurs for entrepreneurs, comparable to a small bank. Members of a credit union formulate policies, elect the board and are joint owners. 

A credit union promotes solidarity between lenders and borrowers and sometimes serves customers just as a bank would. A credit union depends to a very large extent on communication and trust. Research in the US shows that defaults happen less often at a credit union. In addition, each participant has an interest in making the union successful so interests are fully aligned. Good risk management is essential to the success of the credit union.

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(5) Government support – Seize new programs for SME support

Although options are limited, there are different government grants available to SMEs. Gov.uk offers an online tool for finding grant information for your business area. Programmes like Innovate UK are run as a competition and after a rigorous assessment process may offers grants to SMEs in tech, engineering and science. StartUp Loans is another government-funded scheme that funds and mentors entrepreneurs. Successful applicants get a low-cost unsecured loan, business mentoring and a range of business support products if their plan is approved.

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(6) Incubators – Embrace an educated boost

An incubator is a support infrastructure which comes equipped with resources specifically for startup companies in exchange for equity. Sometimes called accelerators these organisations are developed to give new businesses the opportunity to advance as fast as possible by providing the mentorship and resources needed. The existence of these programs has increased greatly in the UK by nearly 110 per cent in the past three years, the problem however is that 61 per cent of incubators and accelerations are located in London, thus neglecting other regions.

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(7) Friends, family and fools – Keep funding close to home

“FFF’s” are still the most popular financiers for early-stage companies, and generally the best first option for an entrepreneur if available. Easy and fast, little paperwork, and inexpensive, these loans come from the people who know you best, they know how hard you work and what they are investing in. 

As these investors come from your close environment it is important to make clear agreements and lay out all conditions officially beforehand. A thick skin is required as these investors can really meddle (often unintentionally) with the policies and direction of a company.

SMEs increasingly relying on friends and family for finance

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