Alternative lending: Funding your business without the bank's help
While the rise of ecommerce has made it easier than ever for people to start a business of their own, getting things right first time will always be challenging. Of all the things occupying the mind of the average young entrepreneur, finance is usually the most prominent - it may not be everything, but the more money there is to hand, the easier the process usually is.
It's no secret that the UK's banks have, in the last couple of years, become a little more hesitant to help small businesses get started. This shouldn't deter anyone from following their business dreams, though. If anything, the declining availability of conventional finance has sparked growth in the number of alternatives available. New services and approaches are emerging regularly to fill the gaps left by the high street banks, which entrepreneurs can use to their advantage.
Here are just a few options:
Friends and family
Anyone starting a business will benefit from the help of those close to them, but it doesn't have to stop at moral support. Borrowing money from friends and family can be a handy tactic, but only if you're in the position to do so.
Raising money in this way is nothing new - it's long been one of the most popular alternatives to conventional bank loans, simply because it doesn't require the start-up boss to go through any formal applications that, without a proven track record or reliable cash flow, they could well fail. More than this, loved ones are unlikely to set extortionate interest rates in the same way that banks will, so it often works out cheaper.
The obvious positive points aside, there are a few pitfalls to consider. When business and family are mixed in this way, there's always a chance that relationships will become strained over time. Regardless of how close you are with the person you're borrowing from, be sure to go through every little detail before anything is agreed - the risks must be known to everyone involved. It should also be clear as to whether there's equity on offer or not. Above all, make sure they know that your business - however much confidence you have in it - is a high-risk investment.
Of all the new options that have risen from the ashes of conventional business finance's demise, crowdfunding is perhaps the most high-profile example - at least in terms of media coverage. The practice of funding a business project or venture by raising financial contributions from a large number of people, crowdfunding has proven hugely popular among capital-hungry entrepreneurs.
Data from the US shows that around $2.8 billion was generated through crowdfunding websites in 2013 alone, and this figure is expected to rocket in the coming years. Aside from being an easy way to gain access to the necessary financial support, it's also less risky than some of the other options available. Risk exists in most normal business contexts, simply because it's so difficult to predict how popular or successful a venture is going to be. When you're collecting support before a product has even gone into production, this issue no longer exists.
It's important to bear in mind that crowdfunding works better for smaller, individual projects than it does for large-scale business ventures. If you have a great idea for a new product, it could well be the way forward to begin with, but it's not as effective as a long-term strategy.
While the banks have been hindering start-ups with their reluctance to make financial help readily available, the powers-that-be in Westminster have been doing quite the opposite. Just as it has with the property sector, the government has increased the amount of help it's ready to provide for entrepreneurs. This could, therefore, be an option worth considering.
If you're looking to get a technology firm off the ground, for example, it might be an idea to contact the Technology Strategy Board, Manufacturing Advisory Service or the Department of Energy and Climate Change - depending, of course, on the intricacies of your project. While your ideas will need to be watertight to stand out from the competition, the rewards are great - if you're successful, you'll likely receive the majority of the funding you need.
Last, but certainly not least, is peer-to-peer lending. Like crowdfunding, this option has received a lot of media attention in the last couple of years, largely because it has proved successful for so many people. In its most basic form, the term could be used to describe one person's action of lending ten pounds to a friend, but this isn't exactly what the newspapers are referring to.
Now, peer-to-peer lending is a huge industry in itself; one that makes it possible for budding entrepreneurs to safely borrow the start-up money they need from individuals and other businesses. Simply put, those in need of funding can now put themselves forward to be matched with others who have money they'd like to invest. The broker - often online - will usually pair the former with a group of lenders, each of whom will provide a portion of the final amount. The benefit here is that the risk is spread.
With interest rates usually lower than those offered by banks but high enough for the investor to make a decent return, this option has advantages for everyone involved.
As mentioned above, the task of getting a business going can be daunting, but preparation is the key to minimising stress. With this in mind, be sure to research your funding options thoroughly - and remember, the banks aren't your only option.