Five alternatives to traditional high-street lending all startups should consider

While a good idea is central to every successful business, it is an unfortunate fact that access to funding is not far behind.

Unless you have the funds to kick-start your business yourself, it is likely that you will need to source outside funding to turn your idea into reality. Your first port of call may be your bank, however, with high street lenders increasingly hesitant to lend to unproven companies, it can be difficult to obtain the funds you need in this way.

If your bank has refused you borrowing - don’t despair. There are now a whole host of alternative streams of finance, some of which may even turn out to be better suited to the needs of you and your growing business. Once forced to look elsewhere due to the banks reluctance to lend to newly established companies, businesses are now actively shunning traditional lenders and seeking out these alternative finance channels due to their flexibility and swifter application process.

Unlike banks which are more used to dealing with individuals or well-established companies, alternative lenders are adept at dealing with SMEs and as a result are more sympathetic and understanding when it comes to the challenges they face. Often quicker to arrange and with less stringent requirements, alternative finance lenders know the importance of moving quickly when funding is required to launch or accelerate a new business venture.

Here are five alternatives to traditional high-street lending you should consider:

Peer to Peer (P2P) Lending– In an age of low interest rates, P2P lending is growing in popularity, particularly with savers keen to see a greater return on their money than what is currently offered by high-street banks. As an entrepreneur you can borrow money through a P2P scheme by taking a loan offered by another individual. You will need to pay interest on any money you borrow which may be similar to the rates you could achieve on the high-street, although it is likely that you will find obtaining a P2P loan much quicker and simpler than arranging borrowing with your bank.

Government Grants– Although competition can be fierce, securing a government grant will give you a useful injection of cash on extremely favourable terms. The majority of government grants are not repayable and this is what makes them a particularly sought after form of business funding. You will need to submit a business plan which will then be considered by a panel who will make a decision as to whether or not funding should be approved. The requirements are extremely strict and can be quite niche based on region, industry, and project.  If you are rejected for a grant don’t be too disheartened; this does not necessarily mean your business is a bad idea, it more likely to be the case that it simply doesn’t fit into any of the categories currently being awarded funding.

Due to the committee process, obtaining government funding can be a lengthy process and is therefore more suitable for start-ups which have not yet started to trade, rather than those who need funding to improve their current cash flow or to take advantage of an emerging opportunity.

Angel Investment– A popular form of alternative finance, angel investors are wealthy individuals, often with extensive business experience, who are looking to invest in potentially fruitful companies at an early stage. Although you will have to make your company stand out and have a business plan convincing enough to grab the attention of an investor, securing investment in this way could benefit your business in more ways than one. Not only will the initial injection of capital help financially, but chosen correctly, an experienced investor could offer you invaluable guidance and sound advice to drive your company towards success. Rather than a bank loan which requires monthly repayments, this type of investment is typically paid back from the profits of the business or when the investor exits the company. So although you will be giving up a share of your profits, your cash flow is likely to be much healthier without a regular loan payment being taken out which could be extremely beneficial, particularly during the early days of trading.

Crowdfunding– Often conducted via online platforms, crowdfunding involves securing finance by way of a number of smaller investments from a larger number of backers. Essentially to be successful in crowdfunding you need to convince a large number of individuals to take a small chance on you. This is not only a great way to raise money, but you are also able to sense the level of appetite there is to bring your product to market based on the interest your idea generates. Money is not usually repaid directly; instead you will typically offer something to those who choose to invest, such as a sample of your product or early access once it is in production so this can be an extremely cost-effective way of obtaining money to kick-start your business. 

Invoice Financing– If your business is already up, running, and generating sales, yet you are having issues with managing your cash flow, a form of invoice financing could be the ideal solution. Invoice financing instantly releases the cash tied up in your ledger book by advancing a set percentage of your unpaid invoices. This can help to relieve the pressure caused by late paying clients and serve as a huge help when planning cash flow projections for the future. Invoice financing is an extremely flexible form of funding as it is designed to grow in line with your sales. Obviously this will only be suitable for those businesses who are sitting on a large amount of unpaid invoices from work already carried out and invoiced for.

While new lending channels have expanded choice, it has also made the decision-making process more difficult. In spite of these complexities, it is vital you choose the right option as your selection of finance at this stage is likely to affect your business for several years, both in terms of its financial outgoings but future decision-making processes. 

The right funding for your company depends on a whole host of factors including how much you need, what you need it for, and for how long. Choosing start-up funding is a major decision, so don’t be afraid of seeking professional advice from a finance broker or your accountant before committing to anything.