Top 10 Ways To Fund Your Business Without Taking Out A Bank Loan

1. With bank lending figures continuing to fall, thousands of entrepreneurs are looking for alternative sources of funding to get their business off the ground. If you’re one such firm, this article provides a comprehensive guide to the tools and options at your disposal.

   Bank overdrafts. For companies with fluctuating income, a bank overdraft can provide quick, flexible cashflow. The idea is simple: you dip into the overdraft in the leaner months, and come back out when the business picks up.

   Most major banks charge interest only on the amount you overdraw, and many offer tailored packages for young businesses. For example, NatWest provides overdrafts up to £500, free of set-up fees, for start-up firms. However rates of interest on bank overdrafts are usually charged above base rates, and in most cases the overdraft amount is repayable on demand.

   Cash advances. Companies such as Business Cash Advance and Credit for Merchants are geared to offering money upfront, before debts and invoices have actually been paid.

   Under the terms of the agreement, the financier purchases a fixed percentage of your future credit/debit card transactions at a discount, and then advances the cash into your bank account, usually within 10 working days. Repayments will be scheduled at a pre-agreed percentage of every transaction – usually between 10 and 20%.

   With a cash advance, you can secure up to £100,000 without the burden of collateral or fixed monthly repayments. But you may have to meet a rigorous set of conditions; for example Business Cash Advance insists all clients must have been in business for at least a year, with a minimum monthly turnover of £3,500 and the ability to process credit and debit card transactions.

   Asset-based lending. An asset-based loan works the same way as a mortgage. You borrow money against an existing possession, and, if you can’t meet your obligations, the asset is repossessed. Assets which can be used as collateral include property and premises, accounts receivable, inventory and equipment.

   Although interest rates are often punitive, asset-based finance can be extremely useful for a company desperate for cash, or a business backed by valuable property which has yet to make major profits – such as a hotel or plant hire specialist.

   Factoring. The factoring process allows you to release the money tied up in unpaid invoices, and removes much of the burden of debt management. When you engage a factor, they will take control of your invoices and assume responsibility for processing them. You will be able to draw funds as soon as the invoice has been approved – before the money actually comes in.

   Factoring can speed up cashflow and free up the time spent chasing bad debts, but there are drawbacks. A factor will impose a charge on each invoice, so your profit margins will be reduced, and it can be difficult to sever a contract with a factoring firm, because you have to compensate them for all outstanding invoices before you can formally part company.

   One alternative, which could be more cost-effective, is MarketInvoice, an online marketplace which allows you to auction your invoice to a community of investors. You receive payment straight away and the investor will receive a profit when the payment finally comes in.
   Crowdfunding. Crowdfunding is, essentially, an extension of the charity sponsorship page in the business world. People come together, on crowdfunding sites, to pool money towards a particular venture or idea – it could be ten people putting in £500 each, or 3,000 people each giving £1.

   Donors or investors on crowdfunding sites, such as Kickstarter or Crowdcube, are typically private individuals providing small sums, so they’re unlikely to give you the sort of grilling, and rigorous conditions, an angel investor would. You can also scope out the popularity of your idea via a crowdfunding site, and get some crucial word-of-mouth marketing going.

   If you’re interested in raising finance using crowdfunding take a look at Startups’ crowdfunding platform. We’ve partnered with Crowdcube to offer businesses a new way to raise seed or growth capital. For more information, read our guide on how crowdfunding works.

   Peer-to-peer loans. A peer-to-peer exchange site, such as Zopa or Funding Circle, will put you in touch with private lenders, and create a personal relationship between you and the lender – fostering trust and patience.

   A number of companies are now well-established in this space, and several offer generous terms. Indeed Zopa waives all fees for loan applications, reduces interest rates for borrowers who make early repayments, and adds only a one-off fee of £130 to the cost of the loan.

   Micro-loans. If you only need a very small amount of money, you should think about a micro loan, which is tailored to your circumstances and can be used alongside funding from other sources.

   A number of companies in the UK offer micro loans; for example Finance Wales offers funding from £5,000 to £25,000, with generous repayment terms ranging from one to five years.

   Community schemes. A plethora of community development finance initiatives, or CDFIs, have been set up around the country to help individuals, and businesses, denied credit by banks and lending companies.

   CDFIs provide help with everything from bridging loans and working capital to funds for property and equipment purchase, but their terms are usually restrictive; you usually have to be either a micro-business or a social enterprise, and be based in a disadvantaged area to qualify.

   Family loans. If you want to keep things ultra-simple, a supportive family, with money to spare, can provide a fair, willing and reliable source of loan funding. Relatives and loved ones are more likely to trust you with their money than an outsider, and they will probably demand lower interest and fewer incentives than a commercial organisation.

   Any finance model or provider should be researched thoroughly before you make any commitments, to ensure this is the best solution for your business. You will find more information on some of these finance options in our Business Financing section. We would also recommend researching specific providers or funding platforms online and speaking to other businesses which have used them.

Do it yourself. Most entrepreneurs and small business owners these days have come to the realization that they will have to self-fund (also know as “boot-strapping”) their projects for a significant amount of time until more formal funding opportunities become realistic. There are many ways to accomplish this from savings accounts and zero interest credit cards to leveraging other personal assets. If you believe in your vision and have an absolute refusal to accept failure as an option, you should feel comfortable investing you own money into the business. In turn, this will make potential investors more comfortable knowing you have skin in the game. Just keep your eye on profitability!

Small business loans. I know what you’re thinking. Banks are more stringent than ever about giving out loans and if you don’t have any credit, how can you possibly consider this route? In our early days, by business partner and I ran into this obstacle all the time. When writing this article, I was doing some research looking for companies that specialize in helping small businesses get quick and easy access to lenders. One company that stood out was All Business Loans.  According to Mike Kevitch, COO of All Business Loans, “Startups seeking money from banks need a good business plan, profitable projections and some of their own money in the game.” Seeking any type of capital can be a full time job in itself which is why companies like All Business Loans can be a great way to take the leg work out of it. Another reason to pursue debt financing is that you aren’t giving away a piece of your business.

Angel investors. This path is close to my heart because we have achieved enormous success in raising money this way. That being said, much of it has to do with timing and leveraging the right contacts. In our experience the “friends and family” route has actually opened the doors to angel investment rounds. A large amount of trust can be built by giving your early stage investor his or her money back plus interest. But just because someone lent you money to launch your business, doesn’t make them the right financial partner for the long run. When raising money from angels or VC’s you have to keep in mind that they will own a piece of the business and you then have a fiduciary responsibility to act in the best interests of the business and its shareholders. Attracting angel investors is a tricky business, and no matter how exciting and positive the initial conversations may be, the devil is always in the details. Know your business plan, be transparent, back up your valuation with real projections (forget the BS hockey stick revenue models), and build a relationship based on trust.

Regardless of which path you take, chances are that you may do all of these at some point as your business grows.  At the end of the day, you have a business to run and none of this matters unless it has your full attention. So find a viable funding solution that also allows you to maintain operations and focus on profitability