This is a guest post by Isabella Ramos.
The difficulty of securing a traditional bank loan for SMEs has been well documented. Given the reluctance of banks to lend, owners of small companies are being forced to look for more innovative types of funding to grow their business. But how do they do it?
Awareness and information keys to success
Recent research conducted by Wonga indicates that around one-third of micro-businesses have been turned down for bank funding. 60 per cent of them suffered cash flow problems or missed key opportunities as a result. These findings suggest that many small company owners simply don’t know where to look for extra finance, beyond traditional bank lending.
Banks often turn down a loan application due to the credit rating of the business and/or the key managers responsible for its operations. For this reason, it is worth performing credit checks on the company and its managers to identify any potential issues as well as to ensure records are complete and accurate.
Even if alternative financing options are being pursued instead of traditional loans, lenders will carry out credit and fraud checks just the same, so it still makes sense for small businesses to do regular health assessments on its credit profile.
You can check your score easily – in private. For those wondering where they can get credit reports, have a look online. Many businesses offer free company checks and deliver business information such as company reports, credit and fraud reports and Companies House documents.
Online portal to educate and provide finance
So, how should owners of SMEs educate themselves on non-bank funding options? The Alternative Business Funding portal hopes to be the answer. Not only will the site educate business owners on the types of finance available, it will also match lenders and borrowers quickly through the internet. The portal supports different types of alternative financing, including crowdfunding, peer-to-peer lending, invoice trading and even pension-led funding.
Now a relatively mainstream option for entrepreneurs, crowdfunding aims to attract hundreds of small investments which can then be used as equity to fund start-ups or businesses in early stages.
The way it works is that you write up your idea and business plan and present it to potential investors, who will contribute a small sum if they like your pitch and believe your project will succeed. There are different ways in which you can reward those who helped to get your business off the ground – you can either give them some form of a perk or gift (reward-based crowdfunding), or you can give them a stake in your business (investment crowdfunding).
Apart from a sound business plan, you will also need financial forecasts in order to access crowdfunding platforms.
Although peer-to-peer lending is also about raising finance from a number of people who pool their resources together, it is very different to crowdfunding in that lenders are not rewarded with any equity or perks. Instead, they receive interest on the money borrowed, much like the arrangements of a normal bank loan.
Rather than start-ups, this type of funding is targeted towards established businesses that have been trading for a minimum of two years. It is suitable for all types of business structures, including limited or non-limited companies as well as limited liability partnerships. Relatively easy and quick to obtain, the money borrowed can be used for any business purposes such as buying capital equipment, stock purchases or even used as working capital.
To access peer-to-peer funding, you will need to provide business financials as well as reasons for the loan. Depending on the amount you wish to borrow, you may also need to provide some form of security or personal guarantee.
Online invoice trading
This form of funding involves uploading unpaid invoices onto an online auction where interested buyers can bid to fund them. Buyers may include institutional investors, asset-based lenders, banks as well as high-net-worth individuals.
Unlike traditional factoring or invoice discounting agreements, there are no long term contracts or exclusive agreements involved with this fundraising mechanism. The borrowing company can choose to sell invoices individually or together in a bundle.
Online invoice trading is a quick and convenient way to raise money as uploaded invoices can be funded in as little as one hour. It is a great way to overcome cash flow issues caused by debtors who take a long time to settle their account.