When better than the new year to start that business venture you’d always dreamed of? But enthusiasm can only get you so far; today we discuss alternative funding routes for those looking to start their own business in 2019.
Unless you’re an inventor with bottomless pockets, it’s likely you’ll need to find funding for your entrepreneurial endeavours after graduation from a higher education course. Fortunately, we’re living in perhaps the most convenient age to secure financing for business thanks to the rise in alternative funding channels. Today we look at how those with the drive to make their ideas a reality can secure investment from a vast pool of backers. Welcome to UKCBC’s guide to alternative business funding.
Please note, this guide for business funding is in no way exhaustive; we urge those looking to finance their business endeavours to delve further into the details of the companies listed below as well as other traditional and alternative business financers.
Laughing All the Way to the Bank?
Traditional funding through banks (and the like) has played an important part in getting new businesses off the ground for millennia; why then are new funding channels being created?
According to business credit management company Nav, “about 72% of small business owners who apply [for bank loans] get rejected.” While banks have played an important historical role in funding small and medium enterprises, their narrow criteria for approval may result in many potential businesses failing before they even begin.
Obtaining loans through banks is a long and often arduous process that requires considerable paperwork. Credit checks form an essential part of a bank’s decision when lending; if the personal and business credit is not healthy enough, it’s unlikely the borrower will be approved for a business loan. Banks are also more likely to accept loan applications for companies that show they already have good cash flow. For many, that means the door to running their own business is firmly shut before they even begin.
Bank loans for businesses aren’t all negative though. Jumping through the various hoops to prove the loan will considerably benefit the company financially has its advantages. By the end of the process, the borrower will likely have considered all the potential outcomes, and they may have even reconsidered whether it’s the right time to invest. Additionally, banks have teams in place to assist businesses that are having financial difficulties (although these business assistance teams are not always as helpful as they might seem).
While banks only provide loans to near water-tight businesses, some of the alternative funding routes come from a much more idealistic viewpoint. This is partly due to the profile of the average funder in such circles – not a professional investor, often emotionally invested in the project they’re funding and investing significantly less than the bank. However, not each alt provider offers the same style of funding, in fact, some may look very similar to banks in their approach. Before we look at a few examples, let’s discuss some of the positives of alternative funding.
The consumer and the investor are often the same person when it comes to alternative funding, and this has several benefits. Entrepreneurs attempting to gain funding via platforms like Kickstarter will need to put considerable time and effort into creating and marketing a proof of concept; this keeps minds firmly fixed on the consumer. Likewise, those willing to fund a project will likely be a similar demographic to those who will buy the product or service – project developers can then leverage this pool of people for market research.
Now let’s look at some of the funding channels, starting with the biggest.
Kickstarter’s concept is relatively simple (and oft replicated): create a project (along with some promotional materials), decide the rewards backers will receive depending on their pledge (early access to a product is a popular example), submit the project and if the Kickstarter team approves it, the project will be live on their site. From there, backers can find the project page and pledge money. It is undoubtedly the most successful crowdfunding platform and was the jump-off point for projects/businesses such as the Oculus Rift, the Pono Music and the Veronica Mars Movie project.
Sounds easy, right? Well, Kickstart is a competitive market, so entrepreneurs would do well to consider a few Kickstarter tips from someone who’s already been there.
Kickstarter takes a 5% cut of the pledged money, and backers must be provided with the reward specified or be refunded.
Indiegogo combines crowdfunding with a slice of the online marketplace. Again, instead of investing in a project for a stake in the business, backers are given rewards depending on the amount donated. Once a project reaches its funding goal, the creators then set about producing the rewards for the backers. Those who’ve created a product can then sell it via Indiegogo’s marketplace, therefore utilising the backer groups they’ve already established by creating accessories and updated products for example. Indiegogo provide creators with a good selection of resources to help the budding entrepreneurs get going, and there’s no obligation to sell the product or service via the Indiegogo platform after the crowdfunding has finished. There are several funding options on Indiegogo that mean creators can keep the funds raised even if the target isn’t hit.
Indiegogo also takes a 5% cut of the pledged money, and it would appear backers have less protection through Indiegogo: “Indiegogo is not able to mediate disputes between customers, including those related to refunds or the fulfilment of perks.”
Peer-to-peer (p2p) technology has revolutionised (or ruined, depending on your perspective) the film and music industry by allowing online users to share content; it’s also has had a significant impact on business lending. Folk2folk is a p2p lender that helps small, local businesses “create and sustain financially and socially successful local communities” by offering loans provided by regular people (who have a spare £20,000). This funding route leans towards traditional business financing as security (in the form of property) is needed in case a borrower defaults on a loan. Essentially, there’s a higher risk if the borrower can’t meet their targets, as the borrower’s property can be seized and sold off if monthly loan repayments aren’t met.
Unlike the crowdfunding platforms mentioned above where you essentially decide how much you want to sell your product for (via pledge rewards), once approved by Folk2Folk, borrowers need to start paying back the loan (typically a 6.5% per annum interest fee).
Thanks to technology there are many routes available to budding entrepreneurs. If you’ve got the drive to succeed, why not give our course advisors a call today to find out how an HND or top-up degree in business can help you achieve your professional goals.