With increasing alternative finance options being made available to small to medium enterprises (SMEs), less and less are going to traditional lending methods. In this post, we look at three different alternative finance methods that are gaining popularity in the market today. According to The Confederation of British Industry (CBI), the amount lent by alternative finance providers reached £939m in 2013, an increase of 91 per cent on 2012’s total of £492m.
Traditionally, financing a company involved asking a few sources for large amounts of money, this is where crowd funding has spun this idea round. The idea is to get as many potential investors as possible to invest in a little amount or as much as they can. The surprising bit is many or none of these investors will even meet the proposer of the investment, everything is done online. This opens up a massive market and window of opportunity for those companies that have been turned down for finance.
There are three types of crowd funding:
Donation crowd funding
People invest or donate simply because they believe in the cause and the returns are intangible such as free gifts, news updates or acknowledgements on a leaflet.
Debt crowd funding
Also called peer-to-peer lending or lend-to-save, investors will receive the money they invested back with interest.
Equity crowd funding
People invest their money in exchange for a share of the company, venture or project. The same logic as all shares, if the company is successful the value will go up, if unsuccessful your share value will decrease.
Tips for your company:
- Do your work and perfect your pitch
- Be engaging and passionate
- Make sure you have lots of time to respond to investors and be open to array of questions
A 2009 study by NESTA estimated that investment sizes were averaging £42,000 per investment with between 4,000 to 6,000 angel investors in the UK. To demonstrate the increasing popularity of angel investing; in 2009, angel investors made an average of 2.5 investments; this has significantly increased to five in 2015.
Wealthy individuals with accumulated income or lots of disposable income invest their own money into start-up companies in return for a stake of equity. Examples of business angels are the faces of Dragons’ Den such as Duncan Bannatyne and Deborah Meaden. Most expect to see between two to forty times their return on investment between three to eight years and may choose to act as an adviser or be a sleeping partner.
Business Angels can act as an individual or in collaboration with other angels who are part of the numerous angel networks operating in the UK.
For SMEs, business angels can be a source of finance with investments ranging from £5,000 to £250,000. The amount invested depends on how much they believe in your business idea. This not only spreads risk for the investor but means more cash can be invested from several investors than with one. Depending on the position of your company, a lot of business angels will invest again in the same company.
Trade finance is basically financing for trade for both domestic and international trade transactions.
When a seller or exporter requires the buyer or importer to prepay for the goods being delivered or shipped, this is when trade finance can occur. Naturally, the purchaser may require the seller to document the goods that are being delivered to reduce their risk. The buyers’ bank may assist by providing a letter of credit to the seller, presenting payment upon receiving certain documents such as a bill of lading. The sellers’ bank can then offer a loan by handing over money before the exchange of goods to the seller on the basis of the export contract.
Bear in mind that banks will only deal with documents and not the actual good or services themselves in which the documents may be related to.
Who can provide trade finance?
- Trade finance houses
Who might need trade finance?