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Small businesses might be getting the cold shoulder from traditional lenders, but there are other options worth considering.
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How to raise capital without a trip to the bank
21 April 2023
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12 minute read
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A question I’m often asked by business owners who are experiencing growth or looking to expand is how can I access capital? In the current economic climate, it’s never been more difficult for SMEs to access this funding from traditional banks and so many business owners are having to think outside the box and look at alternative forms of finance.
Here are seven options to consider that don’t involve the banks.
- Personal capital
As the business owner you can lend money to your business from your personal wealth. If you have equity in your home and your mortgage allows for it, you could borrow money out of this and lend it to your business for mortgage rates. This is the cheapest form of capital but it comes with a high degree of risk. You’re risking your personal wealth for your business.
- External shareholders
Depending on where your business is in its lifecycle, you could consider selling equity to a third party or external shareholders. Think about what other values and skill-sets your shareholders could bring as well. The downside of this option is that you are diluting your own equity in the business, which may be undesirable as the business owner.
- Invoice financing
Invoice financing is the number one form of business financing in the US, UK and Europe and allows a business owner to unlock the cash that’s tied up in unpaid invoices. The financier gets paid when the debtor makes payment so there are no repayments to be made. Typically, businesses can access up to 90 per cent of the sale value of an invoice while continuing to offer credit terms to customers. It’s a powerful form of business funding and allows cash flow to be maintained.
- Credit cards
This is a short-term fix with long-term pain unless you can afford to repay the full repayments each month. It’s risky and can lead your business into a cycle of debt.
- Online lenders
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There are many online lenders in the market and they can be a good option for businesses due to their fast turnaround and because they do not require property security. The downside is they can be expensive and as with all loans, make sure you can afford the weekly, fortnightly or monthly minimum repayments. As with credit cards, this can lead the business into a cycle of debt and we do see some businesses that have a debt stack, that is multiple loans.
- Asset finance
If your business owns equipment or other assets you may be able to unlock cash against those assets and use that money within your business. This is typically known as a “sale and leaseback”. Be aware that you are converting an unencumbered asset into an encumbered asset. However this strategy may have tax benefits worth considering.
- Crowdfunding
Rather than having significant investors, crowdfunding involves a large number of people funding a business or a project. Marketing is crucial for success as you need to convince people that your project is worthy of their investment. There are four types of crowdfunding: donation, debt, rewards and equity. Donation funding is where people give money without receiving any return. In debt-based funding, donors are repaid with incentivised higher contributions while equity funding sees backers receiving a share of the business. Reward-based funding offers tokens or discounts from the company.
The disadvantage of crowdfunding is that it takes a huge effort and marketing campaign to get it off the ground and attract the level of funding you need for business growth.
SME owners may currently feel disheartened as access to capital tightens, which is why it’s important to look at alternatives. Choose the right type of funding for the current position of your business and make sure it also aligns with your plans for the future.
Angus Sedgwick is CEO of OptiPay.
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