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From business loans to Angel investors

There are ways to get capital for your small or start-up business

One of the greatest barriers you will face as a new start-up is access to capital. Some start-up businesses are fortunate (or just plain lucky) enough to hit the ground running. Somehow, they manage to defy the odds and make a profit from the get-go. The trouble is, these businesses are usually the exception, not the rule.

Don’t get me wrong, it could happen. You might well turn out to be this year’s exceptional start-up – and I hope you are. The far more likely scenario, however, is that you will be one of the thousands of start-up businesses that run out of cash before you really have a chance to shine. That is, of course, unless you find a way to get some finance. I prefer the term “opportunity money” to “finance” because “finance” implies that to get hold of some opportunity money to develop your business idea, there will be a cost attached.

This does not have to be the case (at least in monetary terms) and today and I’m going to share some of the more alternative ideas you can use to “finance” your start-up.

Old Money Finance for Start-ups

I like to think of traditional “finance” as the old money. Old money being interest-bearing loans from banks, business grants or the traditional equity for the capital model. It wouldn’t be fair of me to go into the alternative sources of finance without at least mentioning these old stalwarts – but I won’t delve too deeply.

The ‘start-up loan from a bank’ model is widely understood. Both personal loans and business loans can be used here but if you’re a brand-new start-up without trading history (usually 12-24 months of management accounts), the lowest hanging fruit would be for you to take a personal loan and invest that into your start-up as capital.

There are much more comprehensive guides about how you can do that easily available online, so I won’t stray too far into that topic.

Grants may sound old-fashioned but they do still exist. Usually for very specific purposes or in very tight geographic locations but, if you do happen to be starting a business in one of the areas that government grant funding is available, you can benefit from small pockets of opportunity money here and there. To find out if you qualify for a start-up business grant, visit the Government’s Finance and Support Services website here.

The Equity for Capital’ model

Then there’s the Dragon-esque ‘Equity for Capital’ model. It’s pretty straightforward. You pitch your business plan to a group of venture capitalists, angel investors (or dragons) and if they like it and think they can make money out of it, they will give you some money in exchange for some equity in your company – redeemable at a later date in the form of dividends or if you ever sell your company.

This is probably seen as the “trendiest” method because it gets a lot of exposure in the media – and we’ve all heard of those famous venture-backed companies in Silicon Valley. In fact, it’s almost like a badge of honour if you’re a young, vibrant start-up to be able to say that you’re ‘venture-backed’.

The requirements to access any of these old money opportunities are reasonably similar and exactly what you’d expect.

– You’ll need a business plan with a well thought out cash flow forecast

– Be able to demonstrate solid management expertise

– Ensure that you fit the eligibility criteria for any grants

As with any type of opportunity money, it’s always a big bonus if you have a bottomless pit of enthusiasm, passion, and energy for your idea and that you let it shine through in any meeting. Remember, enthusiasm is infectious.

But enough of that, that’s not why you’re here. You don’t want to hear about those dusty old-fashioned ways to finance your business; you’re here to learn about the alternative ways you can finance your start-up, right?

So here we go. Buckle up buttercup – and keep an open mind.

Alternative Finance for Start-ups

Let’s just start by throwing around a few words to whet your appetite; community shares, bootstrapping, peer 2 peer, social finance, equity crowdfunding, credit cards and no holds barred donations. Any of that sound exciting to you? Do you know what they all are and how you can access them?

No? No problem. Keep reading, because I’m about to tell you.

Community Shares

Community Shares are unique in that they are only available to co-operatives and community benefit societies. These are not common models of corporate structure which is exactly why they’re worth mentioning. If you have a business idea that is community-centric, then starting a co-op or community benefit society would allow you to offer withdrawable share capital in your business which any member of your community could invest in.

The money raised from the share offer could be used to further your business aims; to buy land or equipment for instance, and would be repayable to your investors in accordance with the terms of your share offering. Currently, it is not over-regulated and therefore presents attractive opportunities for start-ups and investors alike – particularly where there’s a real community benefit to be had.

Peer 2 Peer Lending

Cutting out the middleman (the bank) is what this source of finance is all about. It allows you to borrow from businesses or individuals in the form of an interest-bearing loan directly through a peer 2 peer (p2p) lending platform. These platforms are strictly business-focused and offer an alternative way to raise finance for businesses and often advertise better interest rates than traditional banks.

They offer either secure or unsecured business loans, and P2P lending can also be used to get personal loans through platforms.

P2P for personal loans is probably the easiest and most cost-effective method of raising start-up capital IF you pass the credit checks.

Crowdfunding, or Social Finance

I heard a great description of this the other day when someone called it “the 21st century equivalent of a donation bucket”. I suppose that’s not far from the truth. Crowdfunding is a fantastic opportunity to bring in some early stage finance but it has to be said that it’s not successful for every start-up who tries it.

The principle behind it is that you share your idea with the ‘crowd’ via dedicated crowdfunding websites like Kickstarter and Crowdfunder and then ask the ‘crowd’ to help you finance it. The crowd is effectively all the people who visit the site in question and of course, anyone else who you personally direct towards your campaign via your own means (through social media for example).

Ideas are not restricted to businesses and donations can be for anything. You can offer incentives or rewards to those who back your idea.

It’s still a relatively new method to raise finance for your start-up but research is starting to show that you’re more likely to hit your crowdfunding target if you tap into your existing social networks (friends, family, and associates) to achieve it. Where the Pareto principle applies to your sales in business (80% of sales from 20% of customers) the same rule can be applied to crowdfunding – 80% of your financial target will be met by people you already know or are referred by people you already know and 20% by people you’ve never met.

It’s a tough way to get finance, but it can be done.

Equity Crowdfunding

Like crowdfunding, Equity crowdfunding allows you to open up your offer to anyone. Where crowdfunding pitches your idea to fans and supporters in order to gain a donation, Equity Crowdfunding allows you to pitch your idea to anyone, but this time offering equity in your company in exchange for investment.

In each case, you’ll still need your business plan, management team and a great story behind your idea.

Do your research – some of the platforms have an established audience and attract plenty of high net worth investors due to their Seed Enterprise Investment Scheme (SEIS) rating, which offers investors a 50% tax relief if their individual circumstances allow.

Really Alternative Method to Finance Your Start-up

If you need something even more out there than those alternative ideas and you’re prepared to take a risk on higher interest rates, here’s one more easy-to-access alternative source of finance for those brave (or desperate) enough to try.

Credit Cards

Yes, those dastardly things we all have but don’t really like to use! With good reason in most cases. Interest rates can be very high, especially if you’re withdrawing cash. However, they can be quite easy to get hold of. If you plan your expenses properly and apply for several cards (that offer 0% on balance transfers) on the same day, you could end up being offered 3 or 4 cards within days.

This gives you easy-to-access cash and if you use the balance transfers wisely, you could get access to enough start-up capital to bootstrap your way through that initial start-up phase (enough time to build a bit of trading history or to develop a prototype or minimal viable product (MVP)) and then apply for one of the other alternative sources of finance when you’re ready to roll it all over into phase 2 of your plan.

You can compare credit card rates at most popular comparison sites.

How do you know which Alternative Source of Finance is best for your Start-Up?

I’m doing my best to give you an exciting answer but the truth is, it all comes back to you, your skills, your plan and how you want to see your business develop over the next 5 years. I know what it’s like to be an excitable entrepreneur, with a great idea and a fearless attitude and for the most part, these two things will get you far.

Sometimes the easiest route is not the best for your business so think twice before you hock up your credit cards or launch your first crowdfunding campaign.

On the flip side, if you truly are an entrepreneur at heart and the fear of failure is but someone else’s faint whisper in your ear, you’ll find a way to make it work whatever you choose.

A Couple of Other Useful Other Sources of Information:

http://www.alternativebusinessfunding.co.uk/

Small business owners can use the Alternative Business Funding website to find the right opportunity. This website brings together market leaders in all the main forms of alternative business funding ñ including crowdfunding, invoice trading and peer-to-peer lending.

http://www.idoxgrantfinder.co.uk/

The GrantFinder website has details of more than 8,000 funding schemes including grants, loans and awards from local, regional and national UK government, European funding, charitable trusts and corporate sponsors.