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Top tips: alternative funding options for small businesses

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In a survey produced by the Federation of Small Businesses (FSB), almost half (47%) of small businesses who had applied for a business loan in the past three months had been rejected.

It is not uncommon to find your application for a business loan has been rejected, especially in the current financial climate, since banks are risk averse which does not often work in the favour of small businesses.

Small businesses are seen as a greater risk when it comes to investment and there are several factors that might affect your application for funding, such as:

  • Your business plan

  • The risk-factor of your industry, i.e. coffee shops

  • Lack of assets

  • Poor credit score

  • If the business owner is in full or part-time paid work alongside managing the business

So what are the funding options if you have been turned down for a bank business loan?

1. Business Angels

Described by Startups.co.uk as “wealthy individuals who invest in startup and growth companies in return for equity in the company”, Business Angels are a great funding option if your business has a distinct USP, you are willing to sell shareholding in return for investment and you can offer your Business Angel a high return on investment each year (20%+).

2. Equity crowdfunding

Equity crowdfunding, such as Circle Up, Crowd Cube are another option to consider and, if your business is creative, you may also consider crowdfunding site Kickstarter, which generated £2.5m for UK projects in the past year.

3. Peer-to-peer lending

Peer-to-peer lending is another popular option to consider. Smarta describes peer-to-peer lending as “a sort of eBay for lenders and borrowers - matching up those who wish to lend money with those who need to borrow. Lenders, which include include Zopa, The Funding Circle and Ratesetter, are incentivised because they generally earn far more than they would if they put the money in a savings account - an average of 9.1% - while borrowers who may not necessarily be approved for a bank loan might find it easier to borrow from the service, albeit at a higher interest rate if their credit rating is low.”

4. Sell shares

Another option is to sell shares to family and friends. This is an appealing option for many as it can be a quick and easy way to generate funding skipping the mountains of paperwork, meetings and phone calls.

It is highly recommended that borrowing money from friends and family is an option to consider once all other options have been exhausted, as any problems with returning on investment could later lead to strained personal relationships.

If you do decide to do this, be sure to communicate all of the risks involved very clearly and get everyone to sign a formal contract.

Christina Farr at Venture Beat recommends approaching well-connected family and friends first and keeping any inexperienced investors away: “If a friend wants to be informed about every minute detail – and worse still, if they expect to interject an opinion about the product – you’re in trouble. Unless they lack deep domain expertise, offer family and friends a brief update every few months.”

Image by Images_Of_Money

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