Can’t Get Bank Funding? Funding Alternatives for Small Businesses

Small business funding alternativesIndividuals raise funds for their small businesses in various ways. The way you raise capital for your small business will depend on your business needs as well as your circumstances. But if bank funding is not an option, and your small business is in need of funding, here are some alternatives.

Personal Savings

If you have adequate personal holdings to finance your business this can be of great benefit since you will not be required to borrow from third parties. When you fund your small business from personal savings, it gives you full control over the running of your company since you are not responsible to any third party.

However, if funding the business yourself is not an option, you may want to try one of the options below.

Family and Friends

Getting money from family and friends is easier than obtaining it from professional investors and lenders. The only limiting thing about getting money from family and friends is the high level of personal risk that is involved.  Potential damage to family relationships is something that should not be underestimated. To avoid any misunderstanding in this arrangement, it is advisable that you treat it as a formal deal with clear terms and conditions. And yes, this includes a written agreement that is signed by all parties. Failure to have a clear set of terms and conditions can cause relationship tensions which can be detrimental to your company.

And, prior to signing an agreement with family or friends, have an independent third party read the agreement. See if they fully understand the language so as to avoid ambiguity.

Venture Capitalists

Venture capitalists (VCs) are wealthy individuals or groups that invest some of their money in promising small businesses. When your business is funded, VCs require an equity stake in the business venture. For instance, if your business venture is valued at £ 500,000, then an investment of £ 125,000 will give the venture capitalists 25 % of your company. What this means is that they will have 25 % control as well 25 % of all profits. It is worth mentioning that the VCs normally start taking financial returns once the business commences making profits.

Some small businesses undergo more than one round of VC funding. A cautionary note. The rule of thumb is last money in is first money out. This means that if you own 75%  and the VCs own 25%, and yet the company burns through most of the available funds, there could be a second round of funding that comes in. Usually, this comes from a second group of VCs. It’s this second group of VCs who now control the shares. The initial VCs essentially loose their investment, which has now become somewhat worthless. The second VC group has put their money in last, and thus they will draw their money out first when it comes time to collect profits, or sell their share.

Government Programs

Local authorities and governments usually give grants and low cost loans to small and medium sized businesses. Take time and look at what options are available from your local government to benefit from this form of cost effective funding. Grants and government loans are only given to particular types of businesses in specified industries and thus your business has to meet the threshold to qualify.

Private or Angel Investors

Angel investors are wealthy entrepreneurs and corporate entities that are willing to inject their cash in auspicious small businesses. They expect to get substantial profits as well as dividends when your business starts making profits. The best thing with this arrangement is that these private investors are also a source of valuable advice in the way you will run business operations for optimal benefits.  They do all they can to protect and grow their investments in your business.

Angel investors are similar to VCs. They invest their dollars the same way. The only difference is that they are individuals, not larger groups.

Crowd Funding

Crowd funding services such as Fundable, Kickstarter and Crowdcube are amazing new alternatives to fund your small business. All you need to do is to place your proposal on these sites detailing your idea to show the potential of your business. Investors will then invest in your business and once the target amount is reached the amount is transferred to your account. The business idea must be very good to attract investors to fund it. And, you’ll have to provide a very convincing sales proposal in order to convince enough individuals to invest in your idea.

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About Nate Goodman

Nathan Goodman is the bestselling author of The Special Agent Jana Baker Spy-Thriller Series. "A terrorist on the loose, a country in panic, and time is running out..." For a free copy visit the author's website. He's also a freelance writer and entrepreneur.