Crowdfunding and Other Alternatives: What Are The Benefits?

As a new business owner, you’ll find no shortage of people telling you about the opportunities that exist online: mostly related to sales and exposure.

One area in which the internet can be especially helpful for new businesses is finance. If you’ve hit a brick wall with ‘traditional lenders’, you’re certainly not alone. Online, there is a small army of entrepreneurs with great ideas, in need of a cash injection. However, there are also many individuals and who are looking for opportunities to invest.

New ways to fund

Over the last few years, we’ve seen new online platforms emerge that make it easier for these two groups to come together. Bypassing traditional sources of finance in favour of new ways of doing things: that’s what alternative finance is all about. Here, we’ll give you the lowdown on the most popular forms of alternative finance, and how they could be useful for you.

Just how ‘alternative’ is alternative finance?

The word ‘alternative’ can be off-putting, especially when followed by anything to do with borrowing money. But we’re not talking about the business equivalent of dodgy payday lenders here: ‘alternative finance’ is an umbrella term, covering a variety of methods that exist outside the traditional banking sector.

Despite being named ‘alternative’, these forms of finance are more mainstream than most people think. Figures show that the UK’s alternative finance market has grown substantially in the last year: growing 161% to stand at £1.74 billion.

‘Crowdfunding’ is one of the highest profile examples of alternative finance. Rather than trying to secure large amounts of cash from a single investor, it involves pitching to thousands of would-be supporters online. Therefore, it offers the possibility of not just raising cash but also of boosting your profile. You can read more about the various forms of crowdfunding, and how to create a successful campaign in our guide dedicated to this topic.

Aside from crowdfunding, there are many other alternative finance options. Here is some more detail on the lesser-known, but equally viable routes.

Invoice trading

Do you have plenty of work in progress, and big payments from existing clients expected in the near future, but your problem is that you need an injection of cash right now?

If this sounds familiar, invoice trading might be an option. Arrangers such as MarketInvoice operate a process whereby businesses can sell one, or several invoices to pools of investors at a discount for instant funding. On one hand, this way of funding can be a very quick way of boosting cash flow. The invoice auction model means that you can ‘sell’ your outstanding invoices within a day. Invoice trading, however, can mean that you have to undersell. This typically means you’ll receive an amount equivalent to 75-85% of the invoices’ face value.

Peer-to-peer (P2P) lending

This is where business owners borrow money not from financial services providers, but from lots of other businesses, and sometimes individuals. Essentially, it’s a form of debt-based crowdfunding.

For instance, with a £75,000 loan, there could be as many as 750 small lenders contributing to it. This is all administered through online arrangers such as Zopa and Funding Circle.

P2P can be a great way to get funding without approaching a bank, however, there are a few things you may want to consider:

  • You should feel confident that you can make a credible online pitch for funding video, as this will be what your lenders use to decide whether to contribute or not.
  • Despite P2P being based on these video pitches, there is still a vetting procedure to go through via the arranger. As a result, you need to make sure your business accounts are in order.
  • A final consideration is the widely varied interest rates of P2P. These are determined on the basis of your risk profile. So the more evidence you have to prove the stability and profitability of your business, the more likely that you’ll secure funding at a lower rate.

Pension-led funding

This involves either ‘loaning’ money to your business from your pension, or your business ‘selling’ intellectual property (patents, copyrights or website domain names) to that pension pot in exchange for cash. In essence, it refers to a range of ways to unlock your pension funds to give your business an injection of cash.

So why might pension-led funding be for you?

It can be a useful way of accessing funds that otherwise you may have considered ‘out of bounds’, and effectively bypass hefty interest payments. By only accounting to yourself, you are effectively in total control of the loan process.

Beware…

Pensions are often thought of as an untouchable means of funding for a very good reason. Your pension has to be big enough to withstand a hit if things go wrong, and your business finds itself unable to pay back the cash. Financial advice is a must before considering this method of funding.

Social finance

If your business is starting from grassroots, and you’re passionate about making a real difference to your community, don’t forget to explore the social finance and funding organisations.

Social finance is not just about grants and loan opportunities, but can also connect you with mentors, experts in different areas, and like-minded entrepreneurs. Examples of social financiers include Co-operative and Community Finance, and Clearly So: an organisation dedicated to introducing investors to social entrepreneurs.

For more information check out Finding Finance, the website of the Community Development Finance Institutions organisation.

Want to know more about making your business ‘investor-friendly’? Check out our help centre for further hints and tips.

Was this article helpful?