4 Alternative Investment Options That SME Owners Need To Know About
Great business ideas are the lifeblood of the economy, but that is only if they are able to get themselves off the ground, which in the early stages will require some form of investment. An injection of money can transform a fledgling business idea into a fully-formed and high-flying company.
However, many business ideas will never see the light of day due to a lack of funding. Since the economic crash, banks across the country have tightened their purse strings and restricted lending to start-ups and SMEs alike. Given that The Treasury stated that 80% of all small SME lending is conducted by the ‘Big Four Banks’ (Lloyds, HSBC, RBS and Barclays), and that 90% of SMEs use their current bank for a business loan without shopping around, it isn’t necessarily surprising that so many promising concepts and ideas fail to take off.
Fortunately, the fact of the matter is that there are now more funding alternatives for SMEs than ever before. In today’s modern world, securing money for your business no longer needs to involve applying for a loan with your bank, so if you’re looking for some funds to help take your business to the next level, continue reading our guide on the different types of investment available.
Private equity investment
Just like businesses, private equity investment comes in all shapes and sizes. Some investment firms prefer to partner with startups that have nothing more than an idea, whereas others favour older companies that have some sort of track record in their industry. The majority of private equity investments will be allocated to SMEs that require an extra injection of money to reach the next stage of their business plan, like Love Energy Savings, who last year secured a £4.5 million investment from NVM Private Equity.
Essentially, your business will be pitched to a fund management firm, which are also extremely diverse. Some could be made up of just a handful of former entrepreneurs, others may be larger institutions spread all across the world. As you might expect, private equity firms are picky about who they will invest in. It’s perhaps best to think of them as the ‘talent scouts’ of investment, and a great deal of their time will be spent assessing your company’s potential, any risks that may be involved and how these can be mitigated. It’s a tough path to go down, but can open many doors if you are successful. One further benefit of working with an equity firm is that they have the capacity to open new networks for you, which could speed up your growth even further.
It’s been more than 10 years since Dragons’ Den first appeared on our television screens, where the nation was gripped watching nervous entrepreneurs pitch their business ideas to five wealthy investors. Whether the concept excited you or terrified you, the ‘Dragons’ on the show were actually partaking in a process known as ‘angel investing’. Angel investors will use their personal finances to invest in the growth of a business in exchange for shares in the company.
The biggest risk in angel investment lies with the investor themselves, as they are handing their personal disposable income over to you, but this also means that you have to make an extraordinarily good case for you and your business idea. One big advantage of securing funding from an angel investor is that they will often be able to offer you a great deal of one-on-one support and personal guidance, a fact that rings particularly true if they made their money in a similar field to your own. Also, when compared to the likes of venture capital funding, angel investors tend to ask for smaller equity amounts in return, although their pockets may not be as deep.
A relatively unknown concept until quite recently, crowdfunding has exploded into the investment world and has had an incredible impact. In fact, in 2012 a senior policymaker at the Bank of England was quoted as saying that online peer-to-peer lending, such as crowdfunding platforms, could one day replace conventional banks as they become ‘obsolete’.
In essence, crowdfunding operates in the opposite way to banks or sole investors. Rather than asking one person or a single bank for a large sum of money, crowdfunding gives you the opportunity to ask thousands of people for small amounts of money. Although platforms such as Kickstarter and Indiegogo were primarily used to fund small creative projects, others such as Crowdcube have appeared to help small businesses secure funding to grow, in exchange for shares.
So, how does it work? Crowdfunding works very similarly to other forms of investment; entrepreneurs pitch their ideas online to the community with a target amount of money in mind and wait to see if people invest. With the right business idea and the perfect marketing and promotion, it is possible to see huge amounts of money raised through crowdfunding in a surprisingly short amount of time. If you’re comfortable with pushing your idea out there for the world to see, crowdfunding can give your business more exposure than other methods and there’s always the potential to surpass the amount you originally needed.
Crowdfunding has become so much more than just raising the funds you need to start your business, which is one of its great benefits. It’s also about building a community around your product or your idea, which is a fantastic way to garner interest as these people will act as your brand ambassadors, promoting your business wherever they can and providing you with real-time feedback. This kind of consumer insight can be invaluable.
Similar to crowdfunding, peer-to-peer lending matches SMEs that are seeking funding with organisations or individuals who are willing to lend the money. Those wishing to raise money to support their business can submit proposals online, and investors will bid in the marketplace to fund business ideas that appeal to them. Speed is a great benefit of peer-to-peer lending, as it allows for significant amounts of money to be raised in a short amount of time, whilst it appeals to investors because of the lower risk factor. Another advantage of using peer-to-peer lending is that it bypasses the complicated processes and rules often put in place by banks that have stopped many SMEs from securing funding.
Raising enough money to start a small business or to fund its future growth can be a challenge, but the great news is that you are no longer limited in your options. Securing a business loan through a bank was never going to be the right choice for every SME, it just used to be that there were no alternatives. Now, wealthy individuals can give your business the boost it needs to reach the next stage, or you can ask a group of strangers to donate thousands. The rules of lending have changed drastically, and hopefully this will mean a wider variety of businesses coming to the market, which can only mean good things for the economy.
As a growing business energy comparison specialist, Love Energy Savings is always here to help you save money. Hopefully we’ve demonstrated to other businesses that finding crucial funding during these bleak times is far from an impossibility.