How to fund your small business without a bank loan

Many entrepreneurs are increasingly seeking out alternatives to bank loans to kickstart their business idea. Here’s our round up of some of the alternative forms of funding available.

Government Start-Up Loan

If your business is either brand new, or you’ve been trading for less than 24 months, you might be able to secure a Start Up Loan backed by the government.

Start Up Loans are unsecured personal loans of amounts up to £25,000. The loan must be used for your business only, and is repayable at a fixed interest rate of 6%. To find out whether you are eligible, check online.

Overdraft from the bank

A bank overdraft can be handy for businesses that have uncertain income streams. It provides fast and flexible cashflow when you need it. Using it sensibly can pay off. For example, you should use it when income is less steady and then as soon as business picks up, pay it off.

Many banks only charge interest on the amount that is overdrawn and some offer specific packages for new businesses. Be aware that interest rates on bank overdrafts are generally above base rates of interest.

Cash advance

Companies including Credit for Merchants, Worldpay and Business Cash Advance, will allow companies to get money directly before invoices and debts have been paid.

The financier buys a fixed percentage of your future debit/credit card transactions at a discounted rate. They then advance you the cash within 10 working days. Repayments are scheduled at an agreed percentage of every transaction. This is normally between 10% and 20%.

This means you can secure up to £100,000 without having to worry about fixed monthly repayments. You will only have to pay it back when you are paid by customers. However, you will probably have to meet many set conditions to qualify.

Asset-based financing

An asset-based loan works in a similar way to a mortgage. You borrow money against a specific asset, and if you end up not being able to pay, then the asset is repossessed. The sorts of assets that can be used include premises and property, equipment and inventory.

Angel investment

If you can get a business angel on board then they could provide funding in return for equity. Most angels are veteran entrepreneurs and understand what it’s like to start a business. Produce an impressive pitch together with sound and realistic projections and you could benefit from this type of investment.

Online crowdfunding

The business extension of the charity sponsorship platform that has become popular during the last few years. People can sign up on one of many crowdfunding sites to pool money towards a business or an idea.

You can usually expect to find individual donors on sites like Kickstarter and Crowdcube, giving small sums. It’s a great way of sounding out the popularity of your idea or product as well.

Peer-to-peer lending

You can get in touch with private lenders on peer-to-peer sites such as Funding Circle and Zopa. From there you can form a networking relationship between your company and the lender. This helps to foster patience and trust on both sides.

There are quite a few companies working in this way, and many offer generous terms. For example, Zopa will waive fees for loan applications and will reduce interest rates for borrowers who make repayments early.

Accessing micro-loans

If you just need a small amount of money for a specific purpose then micro loans could help. They are tailored to your specific needs and can be used as well as other sources of funding.

There are a few companies in the UK who offer these types of micro-loan, including Finance Wales. Typical loan amounts vary between £5,000 ad £25,000, with repayment terms often ranging between one and five years.

Community initiatives

There are many community development finance initiatives (CDFI) around the UK that have been set up to help businesses and individuals who can’t get funding from banks or other lending companies.

They can help with many aspects of business financing, from providing bridging loans to property funds and money to buy equipment. However, their terms are generally restrictive and you will normally have to be a social enterprise or disadvantaged in some way to qualify.

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How to fund your small business without a bank loan
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