At a recent London business event I asked the following question to a group of forty early-stage entrepreneurs: “How many of you have secured a bank loan recently?”
“Anyone?” I pressed.
A single hand popped up.
“When?” I asked.
“Five years ago,” responded the entrepreneur.
Such is the state of bank funding for early-stage entrepreneurs and, in many cases, established businesses too. However, even if the banks are not lending to smaller businesses and start-ups, there are no shortage of funding alternatives. Here are five different routes to funding to get you started.
Crowdlending, or peer-to-peer lending is on the rise in the UK. It allows individuals – from students to wealthy investors – to lend to small businesses, providing a better return for lenders than from a traditional bank account, and easier access to credit for business owners.
The biggest crowdlending site in the UK is www.fundingcircle.com an online marketplace where people lend to businesses. Funding Circle has loaned more than £50m to businesses since it began in August 2010.
Here’s how it works: you apply online to Funding Circle and they check your credit score just as a traditional bank does. This is no easy ride. Unless you have over two years trading history you’re unlikely to be accepted. However, if you get through the application process you’re able to go live with your deal quickly, with your financials and business summary posted online for prospective lenders. Once you’re on the site there is a very high success rate for receiving funding from a database of thousands of registered investors, some of whom can invest from as little as £10 in your business.
Why would they do this? The average default rate is low at 1.1% and the interest rate is typically about 9% after the bidding process. For investors this provides a much better return than putting their money into a bank or building society. For entrepreneurs, the whole process can take between 4-14 days compared to the months it takes to secure lending from a traditional bank. This is a good option if you have been trading for a few years and can show some kind of stability.
Are your customers taking too long to pay you and putting a strain on your cash flow? Many entrepreneurs waste time covering the shortfall resulting from late payments by applying for a bank loan or overdraft. A much quicker and cheaper option may be to sign up with a platform like www.marketinvoice.com. Market Invoice has already advanced more than £30m to small businesses since 2010.
Here’s how it works: the site helps small companies sell outstanding invoices to the highest bidder – various institutions that have signed up to the service. You upload an outstanding invoice, ideally one that is due from a customer with a good credit rating. The service providers bid on what percentage interest they will charge for the amount of capital advanced to you. You choose the best offer. The typical advance is around 70-90% of the total invoice which is transferred to your bank account within four days. You are still responsible for collecting the debt, but the difference is you already have at least 70% of the invoice payment sitting in your bank account.
The cost varies according to bidding and how credible each customer is, but the fee is usually around 2% of the invoice value plus a 0.5% arrangement fee for marketinvoice.com. Sure, it may not be an option you’ll always want to use but it’s a great solution to address any short term cash flow problems.
Some investors are starting to think... well, if the banks are not lending then we’ll take up the slack. Some are taking action through the online broker www.firstfunding.org which has 2,000 investors looking to lend capital rather than invest it. The criteria is similar to a traditional bank loan, so investors are looking for a good credit rating from the business founders, stable cash flow and an ability to pay the loan back within three to five years. However, this site enables deals to get done more quickly and cheaply than a traditional bank.
The process is straightforward and involves filling out an online form at firstfunding.org, then uploading your business financial details. If the loan looks credible then it will receive offers from the registered investors. This is not strictly crowdfunding – more of a brokerage for high net worth individuals, but it’s similarly effective.
An entrepreneur at one of my recent events had received a commission for a promotional video from a large corporate. However, he needed to buy some expensive video equipment before starting filming. Unfortunately, he had already spent two months looking for bank funding to cover this investment. There was a much simpler solution: rent, borrow, lease or hire purchase the equipment. He ended up borrowing some smaller equipment as a favour and then leasing the more expensive items. Within two weeks he had what he needed to deliver the film and get paid. In the early days of starting your business it’s best to limit outright purchasing of equipment, vehicles and other assets that tie up useful capital. You can end up with rapidly depreciating assets, costing you money that could otherwise be used to generate sales.
This is where you make maximum use of the credit terms you have established with your suppliers. If you manage to negotiate credit terms of 30, 60 or 90 days you’ve effectively got yourself an interest-free loan for that period. This is most useful if you’re paid upfront by customers so you can use any free credit period to fund further marketing and growth.
When exploring this option, make sure you pre-agree the vendor payment terms and stick to them to build up trust. If you’re giving your suppliers enough profit you can, over time, negotiate longer payment terms. This approach has provided an alternative to bank funding for many entrepreneurs.
Today an entrepreneur has many more alternatives than going cap-in-hand to a bank. So keep looking. If your business is viable you will find alternatives to start your business and fund its growth.