As business people, we’ve all been there. I know I certainly have – as an entrepreneur who has built many successful businesses over the years, I know that sometimes a little extra financial support can make a huge amount of difference. It’s the push that can take your venture from a small to medium-sized one, to a big one – or from a moderately performing one to a business that’s really going places. But I also know – from my own bitter experience – that it’s not always that straightforward to get business loans from high street lenders, particularly in the understandably wary atmosphere that followed the banking crisis.
Fortunately for those of us who are looking to build our businesses, things have got a lot more interesting in this area in recent years. A lot of this change has been driven by technology – just like so much in our world today – and I’ve been really excited to see how the financial services sector is reshaping itself to become more agile and more responsive to the needs of small to medium sized business owners.
Welcome to the world of alternative financing: here’s my quick run down of what some of these new ways of giving your company a cash injection look like.
I’ll start with the most traditional form of financing, by way of comparison with some of the more ‘alternative’ forms. Typically, you’ll walk into your high street bank, or call a lender, and agree a rate that you’re willing to pay on a loan over a certain amount of time. Your lender’s willingness to give you the money will depend on factors like your credit rating, your business’s performance, or if you have some other form of guarantee.
Peer to peer lending
From the borrower’s point of view, this actually feels very much like the traditional term loan – you borrow the money at an agreed rate and commit to paying it back over a certain term. The big difference here is who you’re borrowing from – with peer-to-peer lending you’re matched up with individual investors who want to see their money grow. The advantage for you as a lender is that costs are generally lower than you’d pay a high street bank – and for investors they don’t have to pay a costly middleman to manage their portfolio.
Equity crowd funding
This is one of those areas where technology has really transformed the financial landscape, and I’m really excited to see how this model progresses and works in the future. The idea is that by using online crowdfunding platforms a business owner can sell equity in their company. The beauty of the technology platforms we now have available is that it has opened up this option to all business owners – there’s no need to try and convince someone to pour huge amounts of cash into your dream anymore, as the crowdfunding model allows lots of people to buy small stakes in your business. The key here – and I’d say that this is fundamentally important whether you’re trying to raise finance or not – is to have a solid business plan and an exciting and realistic pitch that people can get behind.
Chasing unpaid invoices is a pain in the neck – you’re essentially trying to release a big pool of cash that is tied up and unavailable to you when you need it the most. This is another area where technology has transformed this part of the financial sector – now, it’s possible to easily borrow money using your outstanding customer invoices to borrow money, by selling those unpaid invoices to the lender. There are a couple of approaches – firstly ‘factoring’ – where the lender buys the invoices and then collects the money themselves, and ‘invoice discounting’, where you borrow money from the lender then pay them back when certain unpaid invoices are paid. Both options are pretty effective, and you also have the advantage that you’re not selling any part of your company – something that’s always been important to me.
What are your company’s most valuable assets? It could be machinery, buildings, or even intellectual property or your brand. All of these things have varying degrees of value and asset-based lending is essentially a model in which money is loaned to you that uses any one or more of these assets as security against repayment. There are many different kinds of asset-based lending, and the costs involved are usually based on the risk that the lender is taking on, so it’s well worth doing some thorough research before you plunge in.