All businesses need cash to fund growth, but even big companies have little spare capital to reinvest when their value is tied up in orders and assets.
With banks being less likely to lend money, a growing number of small and medium businesses are overcoming the challenge of accessing working capital by turning to alternative finance, such as unsecured business loans and crowdfunding.
With flexible funding, short and long term options and often fast decisions made, there are more options available than ever as alternative services step up to replace the traditional lenders.
Here are some of the key choices available to small businesses looking to finance their entrepreneurial ventures.
Start Up Loans
Start Up Loans is a government-funded scheme that provides advice, loans and mentoring to start-up businesses. The Start Up Loans Company lends up to a maximum of £25,000 at a fixed rate of 6% p.a. to companies that have been trading for less than 2 years.
P2P Lending and Crowdfunding
Businesses and investors can lend to small and medium-sized businesses for specific projects via peer-to-peer and crowdfunding platforms. The market is growing rapidly in the UK and US, with $2.7bn raised  around the world from crowdfunding and peer-to-peer lending in 2012.
Peer-to-peer platforms allow investors to make a financial return based on the amount of interest the borrower pays, while businesses seeking crowdfunding most often offer a non-monetary return such as a finished product, or an equity stake in the business.
Unsecured Business Loans
Image by Lendingmemo (CC-BY-2.0)
Short-term, unsecured business loans are another new form of funding to the UK growing in popularity among SMEs. Ideal for small businesses looking to cover cash flow gaps, lenders typically offer a cash injection of up to one month’s card sales.
With no APR to pay, businesses pay back a percentage of their card takings and keep all of their cash. This allows them to pay loans off within months and removes the need for the back-up of a company’s collateral.
Grants are available to those with a good business case – but they are not easy to secure, with difficult application processes. Among the most popular schemes is the Regional Growth Fund (RGF), which has invested £2.85bn to help local businesses across England grow since its launch in 2010.
Asset-Based Lending and Online Invoice Trading
Another growing market, this type of funding is secured by collateral such as property, machinery or stock. It’s most suited to companies which have B2B sales where the business is not contractual. Invoice financing is the most common form of asset-based lending, filling the gap between delivery and payment.
Online invoice trading has become an extension of asset-based financing, and allows businesses to sell outstanding invoices to investors in real time, for a fee.
Private Equity and Venture Capital
Private equity and venture capital gives funding in return for an equity stake in potentially high growth companies. While private equity firms invest majority stakes in underperforming companies, venture capitalists invest in the early stages of a company’s development.
Typically after a 5-7 year investment, the investor will exit the company by selling their shares, either back to the business or to another investor.
Public Equity Markets
Unlike private equity, the business becomes openly listed with shares which can be bought and traded by the public.
The Alternative Investment Market (AIM) is operated by the London Stock Exchange and is the main public equity market in the UK and Europe for growing businesses. AIM offers SMEs a public market with access to retail and leading institutional investors within a regulatory environment.
Business Angels are usually high-net worth individuals who invest in seed or rapid-growth businesses. They usually have experience of growing businesses and provide guidance and mentoring, and invest directly or through organised networks and syndicates. This type of funding is suitable for early stage companies looking for their next stage of funding.
Pension-led funding uses directors' personal pension facilities to raise capital for their business. Funds are released from existing pensions with MHRC and FCA regulations and repaid over a fixed term or via lease payments as agreed by the trustees and at an agreed commercial rate.
Pension-led funding provides finance without having to give a personal guarantee to a lender, and can provide protection for business assets held within the pension scheme.
In corporate venturing, larger firms provide direct support to smaller businesses. They can do this by offering investment in return for an equity stake in the business, or debt finance to fund growth activities for an agreed return. They can also provide access to established marketing or distribution channels for a return.
Supply Chain Finance
Supply chain finance allows large companies to use their balance sheet to support their suppliers, who are usually riskier SMEs. This alternative funding method allows suppliers to sell their invoices to a finance provider at a discount once they have been approved by their buyer.
However, supply chain finance isn’t suitable for all supply chains and companies need to assess their network first.
Trade finance is suitable for exporting businesses that require working capital on a flexible basis. Whether it’s for financing some or all receivables, or larger one-off deals, trade credits are seen as lower risk because they are supported by a contract.
Small business owners are realising they don’t need to use just one source for all of their financial needs, splitting their mortgage, invoice financing deals and loans across different providers.
With increased competition that has led to all of the alternative financing options now on the market, more and more entrepreneurs – as well as their alternative providers – are flourishing.
By Paul Mildenstein
Paul is the CEO of Liberis, who provide a product called a business cash advance, or revenue-based finance for small businesses.