5 Types of Alternative Funding for SMEs
Ever since the coronavirus first hit UK shores at the end of January this year, many small businesses across the country have faced an indefinite period of economic instability. With 2020 already spelling difficulty for a large amount of SMEs (small to medium-sized enterprises), the Covid-19 pandemic has only exacerbated these pre-existing challenges - forcing thousands of small businesses to shut up shop after the country was put into an official lockdown in March.
For those lucky enough to make it through the initial lockdown, the path to recovery is looking to be anything but smooth. As stricter regulations are being implemented nationwide, it's being estimated that 86% of small businesses will be negatively impacted. With an increased amount of SMEs being denied bank loans, and many appearing to fall through the gaps of the recently announced Jobs Support Scheme, an increasing number of businesses are being forced to turn to alternative funding options for support.
However, navigating this landscape isn't always easy. The alternate financing industry in the UK has witnessed a boom in recent years, and with more options come more questions for small businesses. Luckily, we're here to make it easy for you. In this article, we're going to take a closer look at how Covid-19 has impacted small business, before outlining what alternative funding actually is, and guiding you through 5 types of alternative funding available to small businesses. We are here to help you understand what options are still out there, as well as what will work the best for your SME.
As we've just gone over, 2020 has been an extremely difficult year for small businesses in the UK and across the globe. As a survey by Simply Business has shown, the Covid-19 pandemic has cost small businesses in the UK around £69 billion, with the total only expected to rise in coming months. To break that down, this means that the average small business is looking at facing a loss of £11,000, with the brunt of the damage being felt in in-person industries like hospitality and retail.
One of the main reasons the coronavirus has proven to be so detrimental to the survival of many small businesses is because of the significant impact it has had on incoming cash-flow. The unpredictable nature of the virus also means that it's extremely unlikely businesses will have been able to adequately prepare for the long-term loss of income. As this survey suggests, 75% of enterprises in the UK only have enough cash reserves to last them two months or less. Therefore, when many SMEs are faced with something as indeterminate as a pandemic, if alternative funding options aren't explored, their survival may be ultimately put at risk.
Simply put, alternative funding is a way of financing your business, outside of traditional bank loans or government schemes. Otherwise referred to as 'alternative financing', it's an ideal course of action for companies that have been either rejected from loans in the past, have poor credit, or are unsure about the amount of funding they may need. Lots of sources for alternative funding are available online, and with the increasing industry year on year, there's a growing amount of options open to struggling small businesses. However, to make things simple, we've comprised a list of the 5 top forms of alternative funding. So, join us as we discuss what each of them entails, how they work, their main benefits, and (most importantly) how to access them.
Otherwise known as a merchant cash advance or a PDQ loan, a business cash advance is a short-term type of unsecured cash loan. This means that it is issued and supported only by the credit-worthiness of the borrower, rather than the exchange of any type of collateral. So, for this reason, the loan is dependent on the borrower having a relatively good credit score. Unlike traditional unsecured loans, however, there are no fixed payments each month. Instead, part of the loan is automatically repaid each time a payment is processed on the card machine of the business. This means that the process of repaying can fit in line with how well your business is doing, with the loan being paid off faster when more card payments are processed.
How does it work?
The business cash advance lender will advance a sum over to the business, around equal to that of their monthly card sales turnover. Then, a percentage (usually about 10%), will be deducted from each future sale that is processed on the company's card machine. To break this down, this means that 90% of the revenue from the card sale will go back into the business, and the remaining 10% would go back to the lender in order to repay the loan. This type of loan is available to virtually any business that uses card machines as a form of payment, as long as you also fit the eligibility criteria.
What are the key benefits of a Business Cash Advance?
- Speedy access to funding - With business cash advances, you can often receive the funds within days of applying for them. This is largely because the scheme has high approval rates, so quick decisions are able to be made.
- No business plan required - Don't have an extensive business plan to hand? No need to worry, unlike traditional loaning schemes, business cash advances don't require a business plan. This is because they can gauge your future card sales by looking at your past card performances (listed on your merchant statement). Easy peasy!
- Works in line with your cash flow - Sales fluctuate from month to month in every business, and business cash advances take this into consideration. When you're having a slower month and taking in less revenue, you pay a smaller amount back to the lender, so a bit of the financial burden can be lifted.
- Less unnecessary bureaucracy - No one likes paperwork. Luckily, with business cash advances, lenders are able to access your account digitally by using your merchant ID, so there's no need for sending statements over via post or in person.
Am I eligible?
You'll be eligible for this type of advance if you have been in business for at least six months, can prove that you own the business, and if you meet the minimum sales threshold that has been set by the lender.
How do I access it?
Lot's of private companies offer this type of loan. However, depending on how much you are looking to borrow, some vendors will provide more suitable options than others. It is also essential to do some research yourself on the advance the company offers to make sure you are getting the best deal possible.
Pitch competitions are contests where business owners and entrepreneurs present their business idea in front of a live audience and jury. They are usually catered towards people who are just starting out in the industry and have yet to establish themselves in their chosen niche.
How do they work?
Contestants are required to explain to a jury of investors, corporate executives, and experts why their idea is worth investing in. These pitches typically only last a couple of minutes before the floor is opened up to questions. Each pitch competition has a unique set of requirements; usually relating to the scale of the start-up and the industry that they're in, and they typically take place in conferences or events lasting a couple of days and have multiple stages. What are the key benefits of pitch competitions?
Improves exposure - Aside from potentially providing your business with large amounts of capital, pitch competitions are a great way to get the word out about your business. Most of the events feature large live audiences, and some are even live-streamed. So, in addition to being important business opportunities, these contests also offer up valuable types of free advertising.
Free to enter - Most pitch competitions are completely free to enter, so they don't feature any start-up costs or investments. This makes it an ideal option for businesses who are just starting out.
Networking opportunities - Pitch competitions will be packed with other experts in your field, and this makes them perfect places to network. Pitching your idea in front of other businesses in your industry also sets you up with the ideal platform to make connections and network.
Am I eligible?
To be eligible to apply to pitch competitions, businesses have to be in their infancy stages, so this excludes any businesses that have already reached any commercial level of success. Most pitch competition requires you to be beyond the conceptual stage of your business plan, but to have less than £500,000 worth of funding under your belt. Applicants are then selected based on their business concept, skill sets, and ability to execute their idea.
How do I access it?
Simply browse pitch competitions that are relevant to your specific industry. If you don't know where to start, some big players include The Pitch, the IPSE Freelance Awards, or the Green Challenge if your start-up idea is centred around sustainability.
Crowdfunding is a popular way of obtaining funds through a series of individual investors. It relies on contributions from multiple backers and typically requires the business to set up a campaign which states the desired amount of capital they hope to raise. There are many different types of crowdfunding campaigns, but the ones that are the most relevant to business are; peer-to-peer lending, equity, or donation and reward crowdfunding.
Peer-to-peer crowdfunding, often abbreviated to P2P, includes businesses borrowing funds from an assortment of individual lenders, before repaying the amount with added interest.
Equity crowdfunding is similar to P2P lending, but instead of the lenders taking back repayments, they claim small shares of the business. This means there is no definitive time-frame for them to get their money back.
Donation and reward crowdfunding is probably the type of crowdfunding you are the most familiar with. It relies on people donating to a campaign because they are interested in the cause. It is heavily associated with charity fundraising, but can also apply to businesses, too.
How does it work?
If you want to crowdfund, you need to start with a campaign. After you find a suitable crowdfunding site, the campaign you set up should give some information on your business, the project you are looking to fund, and the amount you hope to raise. The key, then, is to share the page on various platform social media sites to spread awareness as much as possible. Potential investors are then free to visit your campaign and invest however much they choose.
It should be noted that most crowdfunding sites do take a small percentage of your funds, generally around 5%, and this is on top of card processing fees that range from 3-5%.
What are the key benefits of crowdfunding?
It can raise publicity - Creating a campaign and releasing it on an online platform can be a great form of free marketing. If the campaign takes off on social media or is picked up by the press, it can help your business to gain precious exposure and stimulate positive public relations which may, in turn, lead to greater business prospects in the future.
No repayment (with donation and reward) - A massive benefit of raising money through donation and reward fundraising is that there is no need to pay investors back. This can be massively beneficial to businesses who are either just starting out or are facing extreme financial difficulty.
No upfront fees - Even though most crowdfunding sites take a small cut of the funds that get raised, they rarely charge any fees upfront. This makes it a quick and easy option for businesses looking to raise funds without paying any hefty upfront costs.
How do I access it?
Setting up a crowdfunding campaign for your business is super easy. All you need to do is choose what type of crowdfunding is best for you, choose a platform, create a campaign, and then share it widely on social media.
There are loads of tips and tricks out there on how to generate a successful campaign, and if you're stuck for choice of crowdfunding platforms, a great place to start is with well-known sites like JustGiving, GoFundMe, and Crowdfunder.
An angel investor, otherwise referred to as a private investor, or a seed investor, is an individual with a high net worth who provides financial support to small businesses or entrepreneurs. The capital is usually exchanged for a stake in the company, and the angel investor is typically related to the business or entrepreneur through family or friendship networks. Although angel investors usually work independently, they can also combine efforts to form groups, with this format growing in popularity over recent years.
The nature of angel investing varies, and money can be invested in isolation as one lump sum, or on an ongoing basis - depending on the type of relationship that is formed between the business and the investor.
How does it work?
Angel investors are autonomous agents who are normally not linked to any other organisation or company. They funnel their own capital into these projects and therefore are able to invest at their own discretion; without following any external guidelines. Businesses typically turn to angel investors after they have received initial investments from friends and family. The enterprise is normally stable at this point and has proved itself to be viable - but is still in need of a cash injection to scale up the business, or take it to the next level.
The primary role of an angel investor is to provide the business with financial backing, but many also provide an advisory role. Due to the unique nature of angel investing, the amount of funding and details of the investment depends on each investor and their relationship to the business or entrepreneur.
What are the key benefits of angel investing?
Flexible arrangements - Compared to banks and large investment firms that have strict guidelines towards funding, angel investors are much more flexible on the amount they are willing to provide. This makes angel investing a suitable option if you're looking for a large sum of money or slightly less than what is typically offered.
Excellent success rates - One massive benefit of angel investors is that they have really competitive success rates. As this study by Harvard Business School found, firms that were funded by angel investors had higher survival rates and faster growth rates when compared to firms that are financed through other means.
Guidance - Even though tailored guidance isn't offered by every angel investor, if you're lucky enough to find an investor that imparts their wisdom onto you, your business stands a much better chance at succeeding. What's more, these investors normally are part of a broad network of contacts that can also be very useful to your business. How do I access it?
Sadly, finding angel investors isn't as easy as applying for business loans or setting up a crowdfunding campaign. In most cases, you either need to know the investor directly, or be referred to one by a mutual acquaintance. If you're not already in direct contact with an angel investor, networking events or business and trade organisations are a great place to start.
Government-backed loan schemes are types of loans subsidised by the government. They help to protect the lenders when loans aren't sufficiently paid back, and this helps private lenders to significantly lower interest rates. The two main government-backed loans that have been introduced to help with the impact of Covid-19 are the Coronavirus Bounce Back Loan scheme (BBLS), and the Coronavirus Business Interruption Loan Scheme (CBILS).
The Coronavirus Bounce Back Loan Scheme (BBLS) is aimed at helping small and medium-sized businesses borrow between £2,000 and up to 25% of their turnover. Because the loan is government-backed, the business isn't expected to pay anything back for the first 12 months, and after this time-frame, they're only expected to pay 2.5% of interest each year. However, since the loan isn't meant for large businesses, the total amount you are able to borrow is capped at £50,000.
The Coronavirus Business Interruption Loan Scheme (CBILS) is also targeted towards providing relief to small and medium-sized businesses, but (unlike the bounce-back scheme,) CBILS offers up to £5 million to each enterprise who applies. The government guarantees 80% of the finance to the lender, and the businesses are also exempt from paying any interest on the loan for the first year.
How do they work?
BBLS - This loan scheme is available through a series of lenders that have been accredited via the British Business Bank. Since the scheme features a 100% government-backed guarantee, any outstanding capital or interest balances don't have to be covered by the lender. However, the borrower still remains liable for the debt.
CBILS - The British Business Bank also operates this loan scheme through it's accredited lenders. These lenders can include high-street banks, asset-based lenders, and smaller specialist local lenders. The loan can be provided in the form of overdrafts, invoice finance, asset finance, or simpler-term loans.
What are their key benefits?
Easy to apply - It's super easy to apply to both of these loan schemes: just find an accredited lender and begin your application process.
Low-interest rates - Since these schemes are backed by the government, they offer extremely low-interest rates, and only start charging after a year! This makes borrowing money much more accessible and risk-free.
High borrowing amounts - With the CBILS scheme, in particular, large sums of money can be borrowed in a short amount of time. So, if your business is in need of an emergency cash injection, this may be the way to go.
Am I eligible?
To be eligible for the BBLS, you need to have a business that is based in the UK, was established before March 2020, and has been negatively impacted by the coronavirus. You can't apply if you've already been claiming finance from another government-backed scheme.
To apply for the CBILS, your company needs to be based in the UK, have an annual turnover of up to £45 million, and you need to prove that your business was affected by the pandemic, but would have been viable without the detrimental economic effects of COVID-19.
How do I access them?
Just start an application for either of the schemes, with a lender backed by the British Business Bank, such as MarketFinance. Here at Market Finance, we provide businesses with a quick, fuss-free platform to apply to both of these schemes. We don't believe in unnecessary fees, and we even have a friendly customer service team on hand to help you along with every stage of the journey.
So, for more information on what we do, the loans we offer, or how to apply, just visit our site here.