alternative finance

A Startup’s Guide to Alternative Finance

As an entrepreneur, your next venture may be fully developed, and your business model mapped out, both technically and operationally. But in order to kickstart your business by legally establishing the operating structure and opening your doors to customers, you need fuel. That means raising money, and a fair share of it. In an era of artificial intelligence and modernized fundraising, seeking finance is more accessible and the number of alternative finance options available for startup businesses continues to grow.

A study carried out by the Cambridge Centre for Alternative Finance found that over the course of 2017, the online alternative finance arena widened by 35 percent, taking the value to £6.19 billion (for our readers in the U.S., that’s approximately equivalent to $8.2 billion). This shows the increasing importance of alternative finance being available at the click of a button for both startups and fully-fledged businesses.

There are a variety of alternative finance options available, which can fund the stepping stones needed for startup businesses to open their doors and take off into the market. Alternative finance can unlock the barrier between young businesses and high-net worth entrepreneurs looking for their next profitable investment.


For equity and perks

There are two forms of crowdfunding: equity crowdfunding and traditional crowdfunding, both of which take place through a dedicated online platform. Startups can pitch their business idea and “the crowd” will show their support by donating funds toward the business venture.

The mission behind such websites is to bring creative projects to life without financial restrictions, as championed by the likes of Kickstarter, Crowdcube and Seedrs. Revolut, a digital bank revolutionizing currency exchange, raised a total of £3.9 million through Seedrs, giving each investor a small portion of equity in return.

Equity crowdfunding is an investment opportunity that offers a a piece of the pie to investors by giving equity in the business, which releases a financial return. Traditional crowdfunding may offer small incentives or rewards to backers, such as a free trial or inexpensive gift, rather than equity in return.

Related: 6 Ways to Finance Your Franchise

Angel investment

Mentoring and financial support

An angel investor is typically a wealthy entrepreneur who has a vested interest in the growth of newly found businesses. In addition to their financial investment, they bring with them a host of experience, knowledge and industry connections. Depending on the working style of the angel investor, many offer mentoring to guide the startup and introduce them to a network of like-minded entrepreneurs, valuable contacts and suppliers.

Angel investors usually expect a large return on investment, which undoubtedly pushes the business to perform at its financial best. They will usually take shares in the company, which represent their ownership and control. Their keen interest in the startup, its vision and ongoing involvement in the market is what sets them apart from traditional investors.

Venture capital

Seed capital for startups  

Venture capitalists offer financial support to startups that are expected to be of a high growth potential or have already demonstrated high growth. As a result, the payout can be impressive and worthwhile for the venture capitalist. They are typically experienced investors, venture capital firms, investment funds or high net worth individuals.

Venture capital is used at the earlier stage of a startup’s lifetime, also known as the “seed” stage. Once you have established a functioning prototype of your product or the delivery of a service, you will be able to begin the funding process and see capital trickle in. As well as money, a venture capitalist can offer convertible debt, which is a value placed onto the company which should be repaid once it hits maturity date.

Debt funding

Invoice finance 

Invoice finance allows you to access funds locked up in invoices waiting to be paid by customers. This form of finance is typically used further down the line for startups, as it requires customer sales and an established credit record.

By using invoice finance, you can release cash quicker into the business, saving you time waiting around for customers to make a payment. By taking out invoice finance, you will be able to take more control of your cash flow and make transactions quicker.

Invoice factoring

Invoice factoring is a form of invoice finance that allows you to release cash from your invoices, faster than a customer makes payment. In comparison to invoice financing, invoice factoring gives you less control of your sales ledger. This option is also less confidential, as the customer will be aware that you’re outsourcing invoice collection by using an invoice facility.

Here’s how invoice factoring typically operates:

  • Fulfill the customer order by providing the goods or service
  • Raise the invoice
  • The invoice finance provider will make payment to you
  • The end customer will settle the invoice balance with the invoice finance provider. The lender will manage the follow up process and collection of the invoice
  • The lender will pay the remaining agreed total to you, minus the service fee 

As a startup, you may lack the time and manpower to chase customers for payment, so this option can prove worthwhile as you will be able to reallocate time and resources.

Invoice discounting

Invoice discounting is similar to factoring; however, it provides more control over your sales ledger as you will be responsible for payment collection from your customer, including the follow-up process.  As this is the case, the customer will be unaware of your use of an invoice finance facility.

Here’s how invoice discounting typically operates:

  • Provide the ordered goods or services to the customer and raise the invoice
  • The lender will release cash from the invoice and send this to you
  • Collect payment from the customer. You will be responsible for payment collection and the follow up process
  • The agreed amount will be claimed by the lender, including a service fee

Invoice finance can provide essential working capital for your startup, helping you stay one step ahead by putting the necessary funds aside to replenish stock and maintain service levels. As a startup, you will require time to raise reserve funds for your business in order for cash can to be spared and distributed across different operations. In the meantime, invoice finance can help bridge than gap and give your new business a steady stream of working capital.

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Business loans

Bespoke funding for your startup

A variety of business loans are available, from unsecured personal loans through government backed schemes and not-for-profit entrepreneurial loans through the likes of Virgin Start Up. A startup loan can provide the necessary funds needed to launch a business and breathe life into it. The loans can be used to purchase equipment, rent property, pay wages and cover startup expenses.

Government grants are also available for startups, saving you in upfront costs and capital which could be used elsewhere. A government grant is typically given to help your business contribute to the economy and boost spending. 

P2P lending

From a friend to a friend  

Peer to peer lending is essentially entering into an agreement with a peer, friend or family member to invest money into your startup and return it at a later date, including interest. This is sometimes known as crowd lending.

The risk can be a lot higher and result in bad debt for the peer if you fail to repay the money. This also holds a risk for the reputation of your business, which can damage customer demand. This form of lending cuts out the middleman and directs you straight to the borrower. Some online platforms have reserve funds which can be used as protection for the lender if you fail to repay the money.

When utilizing alternative finance methods as a startup, it’s important to work with a lender who is transparent about the fee structure, as high interest rates can often eat into your profits. Alternative finance should be viewed as an extra support for the business, rather than life support, as it is typically short term. Seeking non-traditional finance can be a quick method to raise funds that are essential to your startup and is growing in popularity as the variety and accessibly widens.

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