Focus on funding: Alternative funding sources

Traditional money lenders are not splashing cash like they used to. According to new figures bank lending to businesses fell by £300m in the first quarter of 2013. Thankfully there are now swathes of alternative funding sources to pick up the slack.

In this article we intend to discuss:

1. What are alternative funding models?
2. What are the specific options for entrepreneurs?

What are alternative funding models?

When banks tightened their lending controls post-crash the number of start-ups unable to gain access to the cash they needed grew. In order to give these young businesses a chance, a number of alternative funding models entered the market – giving entrepreneurs the investment they needed.

One of the most common models to emerge from the group was crowd funding. This is the practice of accepting small amounts of investment from a large number of parties rather than getting all of your funding from one investor.

There are many different platforms out there which are suited ti difference businesses. Some expect equity in return for investment others expect some kind of reward.

“For entrepreneurs, crowdfunding represents a breath of fresh air, offering a new way of raising money that has many benefits over the traditional routes to finance,” says Luke Lang, co-founder of CrowdCube.

“Firstly, by spreading an organisation’s investment between lots of smaller investors, the owner can tap into a bigger pool of talent and experience with people who have a vested interest in the business’s success.

The company is also less likely to be held to ransom by a single large investor who could withdraw its offer at the last minute, negotiate an unfair stake or become a difficult, overbearing shareholder who meddles too much in the running of the business.”

There are also a large number of lenders who have emerged with different terms for businesses. Many have come to market intending to back smaller players and start-ups and so are much more likely to open their coffers than the banks.

So what exactly are the options? Here’s just a pick of the bunch

IWOCA

The name is short for Instant Working Capital. It is aimed at retailers using online marketplaces such as eBay and Amazon. To apply you go to the site and fill in a form including links to your marketplace shop.

The guys at IWOCA analyse your business performance and decide whether they think you are suitable. It is ideal for sellers on marketplaces who want to expand their businesses and create their own web presence.

Crowdcube

Crowdcube is an equity-based crowd funding platform which means entrepreneurs can go on and pitch for investment in return for a percentage of ownership of the business. Crowdcube recently used its own platform and raised £1.5 million in just three days. The average investment raised on the platform is £145,800 and average equity offered in return is 16%.

MarketInvoice

This is not exactly an initial funding vehicle but a chance to get some cash through the doors quickly once you’ve taken off. MarketInvoice is an online marketplace for investors who are willing to buy the invoices, giving you access to flexible working capital.

It helps to deal with the kind of cash flow problems which arise from late payments. You put your invoice to auction on the site and investors bid to provide you with funding at the lowest cost.

BloomVC

Another version of the crowd funding model BloomVC offers start-ups cash in return for rewards rather than equity. It means that young businesses can get access to cash without giving any of their company away but it also has another bonus.

“By offering your products and services to investors in return for funding you are proving the model of your business and gaining clients and customers before you launch,” says Michelle Rodger, Chief Communciations Officer at BloomVC.