If you’re at the ripe stage of raising finance for your start-up, you may have explored multiple avenues, many of which are new arrivals to the lending platform and a subsequent amount driven by new technology which is advancing at a swift rate. Prior to making any landmark decisions about the start-up capital for your business, consider the implications this will have on the long term future of the company, such as financial commitments and liabilities. As a result, you may consider methods of raising finance dependent on your long term goal.
Similar to a mortgage, you should exhaust interest-free methods of seeking finance from those around you if they have funds to offer on a borrowed basis. Alternatively, they could make a formal investment in your business which would give them a shared interest, including a return/share in the business. In addition to pitching your business idea to family and friends which is a fast way to build up your pot, you could also identify and realize any personal assets of significant value.
This way of acquiring seed capital may mean no interest; no charges and no ongoing pressure from banks, helping you borrow funds without the worry of any external pressures. From crowdfunding, peer to peer lending, factoring to angel investing, there are multiple ways through which you can access funds. The variety gives you the ability to pick the most appropriate way to borrow, tailoring each aspect of the funding journey to you.
Digital transformation of lending
The digitization of financial services, including in the commercial banking and lending sector has changed the landscape to allow for quicker access and faster delivery as a result of integrated modern technology. Banks are allowing instant access to funds by offering services that boast fast approval and even pre-qualifying funds you may be eligible for, making money more accessible for businesses. As new lenders enter the market, they are able to offer a modernized service engineered with fintech. Following advancements in modern technology and significant developments in artificial intelligence services (AI), services are turning towards automation to pre-empt your needs. This streamlines the process and makes it more efficient, encouraging customer loyalty and boosting satisfaction.
Initial costs relating to launching a start-up can include the following:
- Market research
- Professional fees: Consultations with business figures and mentors, insurance, accounting
- Deposits to secure deals with suppliers and affiliates
- Marketing: Advertising collateral, digital promotion, website creation, licenses, event launch
- Business rent, utilities, Wi-Fi
- Recruitment, training, employment, and salaries
- Equipment, furnishings, technology
When launching a start-up, the costs will come showering down as you will need to establish every aspect of your business, from production, distribution, employment, training and customer services. The nature of your business will dictate the level of investment required at this early stage, marking the first step in your journey, such as establishing physical premises, branded marketing collateral and an official launch plan.
Funding methods that you may consider to fill the funding gap can vary as each lending style varies in what it requires as a return for the lender if anything at all in some cases.
Peer-to-peer (P2P) lending is offered through an online platform that connects lenders with borrowers, cutting out traditional means of borrowing money. The lender will set the terms of the lending agreement, such as the period in which the loan should be repaid and the interest. The peer-to-peer lending platform cuts out banks, directing you straight to the investor through the intermediary of the digital platform. This is an appropriate lending method if the amount you wish to borrow exceeds the amount the bank wishes to lend and is too little to warrant a return for larger investors.
Taking the peer-to-peer lending route requires a strong credit score which reflects upon responsible borrowers. There are multiple P2P lending platforms, such as Rate Setter and Funding Circle which can offer you competitive rates so ensure that you take advantage of the best deal out there. Once funding has been confirmed, repayments can be straightforward as they are typically fixed meaning that you’ll know exactly how much to set aside. Peer-to-peer lending is an appropriate option if you would rather retain full ownership of your business, rather than compromising on stakeholders.
Crowdfunding can be attributed to the success of many now household names, such as Monzo, the challenger bank which raised £2.5m through Crowd cube. Crowdfunding platforms such as Kickstarter, Crowd cube and Indiegogo provide a platform through which start-ups can list their business idea, which individual investors can then donate money. Investors through such platforms are not necessarily savvy business moguls, they can range from interested individuals to general fans.
The funds raised through such platforms are typically an accumulation of donations raised from multiple sources making up the active internet community. Each platform varies depending on the return which is on offers, such as equity which offers a share in the business or an incentive such as free tickets or access to a prototype version of your product, etc. This way of funding can prove to be long term, however, it offers the opportunity to gather invaluable feedback from an interested community made up of both business-minded individuals and ordinary internet users with an interest in your product.
Appetite for alternative funding in young businesses
A study conducted by Thin Cats found that younger businesses are showing a stronger appetite for alternative funding over older businesses established over 35 years ago. This coincides with the finding by Thin Cats that older decision-makers turn to bank providers for finance over younger decision-makers who are more likely to seek finance from alternative lenders.
To put this into perspective, the study found the following in relation to the age of the business and their appetite to turn to the bank for a traditional loan in their first move for funding:
- 31 percent of businesses under the age of 10 years old approached the bank for finance
- 61 per cent of businesses established 10 to 20 years ago turned to a banking facility for finance.
- The highest ranking figure shows that 71 per cent of businesses over 35 years old took a liking to taking out a loan with the bank which supports the above claim by Thin Cats.
This shows a clear shift in the way new business owners raise funds for their business and the probability of their openness to sharing financial data with alternative finance providers.
In addition to crowdfunding, peer-to-peer funding and a traditional bank loan, there are multiple ways through which new businesses can raise capital which ranges from:
- Invoice Finance
- Angel Investment
- Traditional Bank Loan
There are many new initiatives, many of which are tailored to new businesses and start-ups, helping them get their feet off the group. Prior to locking your hopes on one type of finance, ensure that you shop around and get the best deal out there by comparing the rates and returns, as although it may be cheaper to hand over a small percentage of your business, this could bear strong significance in the future when it comes to growing the business, winning new stakeholders and devising new initiatives to win business.
About the Author
John Baird is a partner at Scotland Debt Solutions, a personal debt solution for Scottish residents in financial distress, offering debt solutions such as Sequestration, Debt Arrangement Schemes, and Trust Deeds. John is an experienced debt recovery specialist and has a strong track record of assisting individuals struggling with outstanding loans.