Editor | 3 June 2016
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More businesses rejecting traditional finance in favour of these five alternatives

New research suggests that more and more small businesses are being turned down for traditional business financing.

A study from alternative investment company Amicus found that one in six (16%) of small businesses had been rejected by a mainstream lender like a high street bank, and many of them were turning to alternative routes of funding instead.

But what alternative routes are available, and what types of business are they viable for? We’ve identified four of the most promising types of alternative funding and evaluated them below.

Crowdfunding

Crowdfunding is what kicked off the alternative finance revolution. Before websites like Kickstarter, Indiegogo and Crowdcube, small businesses had little choice but to go to their bank or find a rich private investor.

In exchange for capital, small businesses can offer either rewards (Kickstarter, Indigogo) or equity (Crowdcube). Crowdfunding evangelists note that these platforms are a great way of reaching out to potential customers at a pre-launch stage, and they also get people interested and involved in a brand right from the get go.

Bear in mind that Crowdfunding isn’t for everyone. It is used primarily by B2C brands that appeal to a younger audience. Generally speaking, platforms like Kickstarter reward original ideas that capture the imagination and share easily on social media.  

 Asset-based lending

Asset-based lending isn’t new, but it is an alternative to traditional business loans. As the name suggests it is funding secured against an asset, similar to a mortgage. And just like a mortgage, if you fail to repay then your asset can be taken away from you.

Assets can include stock or expensive bits of machinery, but they don’t always have to be physical. You can also secure funding against non-tangible assets like invoices.

This kind of funding suits high growth businesses that are looking to borrow in larger amounts and keep cash flow ticking over.

Bootstrapping

More and more businesses are choosing to shun loans and finance altogether. Instead they choose to go it alone on meagre personal investments and company profits.

The growing popularity of internet businesses, as well as other recent phenomenon’s like co-working spaces mean that start-ups can establish themselves with minimal financial resource.

This mode of funding (if you can call it that) is popular with 20-somethings and people setting up businesses ‘on the side’ of more traditional employment. Be warned though, it can be difficult to grow without larger capital injections.

Peer to peer lending

Again, peer to peer (P2P) lending, also known as crowd lending, is not exactly new. Individuals and organisations have been lending money to each other for centuries. But the ways in which people lend each other money have changed to make it much easier for businesses to find capital.

New lending platforms like Funding Circle, Ratesetter and Zopa are effectively financial matchmaking websites. They link small firms that are hungry for investment with organisations and individuals who are willing to take on a bit more risk in exchange for a better return on their investment (compared with a savings account).

In the majority of cases, these lenders will offer better lending rates than banks. But they aren’t stupid. They’ll want to see a proven business model and a solid plan in place before investing anywhere. 

For more information please email team@cloudaccountant.co.uk