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Businesses turn to alternative money trees as big bank lending stalls

Smaller businesses are turning to alternative ways of financing in much larger numbers than five years ago, as traditional lending flatlines, according to a new report.

Marketplace business lending, which used to be called peer-to-peer, is now providing more than £2 billion a year to British small and medium sized businesses (SMEs), the British Business Bank said.

It is a 374% rise since 2014, the year the bank was set up by the government.

Meanwhile equity finance, providing money in exchange for a stake, has jumped by 131% over the same period.

Since it was set up the Business Bank has provided support to success stories such as cybersecurity outfit Mimecast, and fintech firms Transferwise and Revolut.

Earlier this week Revolut announced it had raised another 500 million US dollars (£387 million), giving the business a valuation of around £4.3 billion.

But while alternative financing has boomed in the last five years, gross lending from major banks to smaller businesses has remained largely flat, growing just 1.2% in real terms.

Gross bank lending reached £56.7 billion last year.

In 2014 it was £53 billion.

Last year 52% of smaller businesses that wanted financing looked beyond the Big Five banks, according to the research.

There is evidence that the flatline in traditional lending is due to demand from businesses drying up, British Business Bank chief executive Keith Morgan told the PA news agency.

More than 70% of them say that they would be willing to forego some future growth rather than take more loans.

Mr Morgan said that small business confidence seems to have rebounded in recent months.

“We are seeing some indication that confidence has rebounded given the additional clarity that is now present with the outcome of the general election and the increased understanding of the course with respect to Europe,” Mr Morgan said.

However it is too early to say whether that will increase demand for finance, he added.

Business Minister Paul Scully said: “Finance for small businesses is essential to our goal of making the UK the best place in the world to start and grow a business.

“This report will shape our support for business leaders across the country, so they can drive innovation and growth.”

By August Graham

Source: Yahoo Finance UK

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Crowdfunding 101: How UK Businesses Can Use Crowdfunding As A Viable Alternative Finance Option

Over the last decade, many new types of alternative finance have emerged in the UK market. Some of these have built upon the traditional methods of funding a business, while others have quite successfully disrupted the market to a certain degree. Crowdfunding belongs to the latter category. Getting a group of individual investors to pitch in together to fund a business isn’t something new, but crowdfunding, with the help of available technology, has made it possible for thousands of people to back a product, a service or even just an idea in their personal capacity.

What Is Crowdfunding?

Crowdfunding is exactly what it says it is. Up and coming businesses (especially the ones that find it tough to raise finance via traditional channels) share their ideas, business plans, product prototypes and everything else that is relevant on a crowdfunding platform and individual investors decide if or how much they want to contribute. The investors, in return, can get equity in the business, dividend from the revenue or royalty from each sale made, depending on the terms of contract. It sounds quite simple, because it is. The only decisive factor here is the merit of the idea being pitched.

The UK Crowdfunding Market

Crowdfunding, as we noted earlier, is exciting for both businesses and investors. However, these are still early years, and it would be unfair to compare crowdfunding with other finance/investment avenues such as business loans or commercial finance. It is estimated that from its inception in 2011 to 2018, crowdfunding has contributed over £600mn to UK businesses.

Is Crowdfunding The Right Choice For Your Business?

Not all businesses are built the same. Crowdfunding can, however, be extremely helpful in getting your business off the ground. Many young businesses and start-ups use crowdfunding just to get through the proof of concept phase (building a prototype, sending products out for testing, acquiring relevant licences and clearances, and so forth). Crowdfunding may be the right choice for your business if:
  • You only need small capital, but you need it fast,
  • Your products/ideas are relatable and solve real life problems,
  • You can’t raise money via other, more private finance options like personal loans, overdrafts and lines of credit.

Types Of Crowdfunding

Most crowdfunding pitches belong to one of the following types:

Equity Based Crowdfunding (Investment Crowdfunding)

This is, by far, the most important type of crowdfunding. As a business owner, you ask for and receive funding from investors who, in return, receive a proportionate stake in your business (in the form of equity). Equity based crowdfunding is ideal for businesses looking to raise a significant sum of money upfront. This is very similar to syndicated angel finance (please read through our guide to angel finance to learn more).

Equity Crowdfunding And Tax Reliefs

Equity based investments in qualifying businesses are eligible to receive tax reliefs (as applicable) under the EIS and SEIS.

Credit Based Crowdfunding

Credit/loan-based crowdfunding is nothing but peer-to-peer finance (P2P finance). Contributors here act as private lenders who lend you money upfront via the crowdfunding platform you choose. You are then required to repay the crowdfunding platform at a pre-set interest rate. This is a good alternative finance option for businesses that don’t want to part with equity.

Reward Based Crowdfunding

Reward based crowdfunding allows you – as the borrowing business – to reward contributors in a variety of ways. The most common reward is early access to your products/services.

Donations/Charity Based Crowdfunding

Not all businesses can afford to pay their contributors back. Social enterprises can raise money in the form of donations/charity and use it to fund their business goals.

How Does Crowdfunding Work?

Crowdfunding platforms play an important role here. There are dozens of crowdfunding platforms presently operational in the UK. Seedrs and Crowdcube are two prominent examples. Once you know what type of crowdfunding you want to go for, you will need to make public a few important details about your business.
  1. What you’re offering in terms of products/services
  2. How they make a difference
  3. If you have any intellectually protected assets
  4. How much you want to raise
  5. How much you’ve already raised from other means
  6. How you plan on using the funds raised
  7. What the timeline of progress will be
  8. What you’re offering in return

Is Crowdfunding Regulated In The UK?

Most crowdfunding activities in the UK are now regulated by the Financial Conduct Authority. Loan-based crowdfunding and investment/equity-based crowdfunding are regulated heavily considering the risks involved. The FCA also regulates crowdfunding platforms in line with their policies.

Things To Avoid While Preparing Your Crowdfunding Pitch

As things stand today, there’s no way really for us to tell what percentage of crowdfunding pitches manage to meet their goals. We do, however, have observed a few key trends that seem to be common denominators among campaigns that fail. Here are the things that you may want to avoid while preparing your crowdfunding pitch:

Confusion And Chaos

This is probably the biggest red flag for any investor. When you prepare your pitch, you need to be as sure as you can about what you’re pitching. Your pitch needs to speak to the investor and answer their questions before they have the chance to even ask them.

Bad Ideas

There’s no way you can sell a bad idea to people and hope to succeed. Paying enough attention to whether the idea is viable, profitable and scalable should be at the centre of your considerations.

Bad Valuation

Many start-ups and young businesses tend to overvalue their ventures. It helps if you bring on board experienced professionals who can evaluate your business for you without any bias. A reasonable evaluation means that potential investors can see how it makes sense to invest.

Crowdfunding Alternatives – Have You Considered These?

Raising money on your own – through personal finance and from your friends/family – is usually the safest bet when dealing with small amounts. However, if you want your business to really take off, you need to take commercial finance more seriously. There are quite a few commercial finance solutions available in the market that, when utilised properly, can prove to be much more affordable and much less tricky than crowdfunding.

Business Loans

Raise money as and when you need it and use it towards the business expense of your choice – from fulfilling purchase orders to settling existing loans.

Asset Finance

Finance the purchase/lease of expensive equipment through fast, affordable and easy asset finance.

Angel Finance

Bring experienced investors on board and benefit from their expertise and industry connections.

Specialty Loans

Use specialty loans like HMO finance, development finance, bridging loans, BTL mortgages and more to raise money from specialist lenders at low interest rates. Commercial Finance Network, a leading whole of market broker in the UK, makes it easy for you to match with UK-wide lenders. Every commercial finance application we receive is decided upon within 24 hours – that’s our promise! To know more or to request a call back, call us on 03303 112 646. You can also fill in this short online form to get started.
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Angel Investing 101 – Everything UK Start-ups & SMEs Need To Know About Angel Finance

The world of modern business, despite having achieved incredible heights over the past century, still values ideas that are worth pursuing. Creativity, innovation and passion have always been at the very core of successful businesses. This is apparent when you look at the start-ups that ‘make it’ to the top. And no, we aren’t just talking about the big tech names – even a relatively modest, local restaurant that offers something new, exciting and unique has the potential to make it to such a list. At the same time, it must be conceded that not all ideas are fortunate enough to find the financial backing they deserve, especially from the traditional channels of business finance. Not all banks want to take the risk, not all venture capitalists have the time to go through thousands of pitches they receive every month, and not all high-street lenders understand how the whole thing works. This is where angel investing comes into the picture.

What Is Angel Investing (Angel Finance)?

Angel investing is an important type of alternative finance options available especially to start-ups and SMEs in their early stages of growth. Unlike traditional bank loans or business loans, angel investing comes from an individual (the angel investor). Angel investors are typically high net worth individuals who bring on board a great deal of experience in various business operations. “Combine the angel investors’ ability to fund your ideas along with their experience and industry connections and you have a perfect launchpad to help your business grow.”

The Angel Investment Market In The UK

Angel investing has always been a popular choice among businesses because of its simplicity. Things took a turn for the better as the Enterprise Investment Scheme was introduced in 1993. Since then, over £18 bn has been invested through the EIS alone. The yearly projections by The UKBAA estimate that in 2020 over £2 bn will be invested in start-ups and pre-revenue business models. Angel investing has also received a boost from an unlikely ally: the pop culture. Popular television shows like Shark Tank and Dragon’s Den have added a touch of glamour to the whole market and helped many first-time investors take the leap of faith and invest their time and money in local start-ups.

How Does Angel Investing Really Work?

As far as the UK angel investing market is concerned, the largest share of investment comes from small to medium scale investors who want to achieve two goals with such investments:
  1. Put their savings/disposable earnings to the most profitable use by investing in a venture that they can understand and help
  2. Claim important tax savings through the EIS.
For most business sectors, angel investors can claim up to £300,000 in EIS tax relief, while businesses cannot raise more than £5mn per year through the EIS. Given these numbers, it’s easy to see why most angel investments lie in the £10,000-500,000 range. Syndicated angel investments, in which two or more angel investors team up to fund a business, can see this number go as high as £2mn.

Angel Investments Are NOT Loans

If you’re looking to fund your start-up with the help of angels, this is the very first thing you need to know: angel investments are nothing like business loans. In exchange for the money your business receives, you’ll be required to give up equity to the investor. The amount of equity you ‘sell’ depends on the investment appetite of the investor.

The Risk

Angel investments are inherently risky for the investor since they have to put their money on the line. The risk is mitigated by the potential of the business in question to provide returns that are significantly higher than those provided by other investment options.

Angel Investments And Equity

The only potential downside to angel investment, from the business owner’s point of view, is the sharing of ownership in the business. Most businesses, in their early stages, aren’t ready to give up a significant chunk of equity. Angels, however, are open to negotiations when it comes to striking a mutually beneficial deal. Moreover, angel investors looking to make the most of EIS/SEIS tax reliefs cannot hold more than 30% of the equity. It’s common for investors to ask for equity in the range of 5 to 20%.

Has Your Business Got What It Takes?

It’s not always easy to predict what an angel investor would look for in an investment opportunity. From what we, as a leading commercial finance broker, have observed over the years, there’s a recurring theme that you may want to judge your business by.

Real Life Value

Angel investors usually prefer businesses that aim to add real-life value. Products and services that solve real-life problems always make for a good pitch.

The People

Angel investors, being individuals, prefer to work with people who are motivated and prepared to do what it takes to succeed. It’s not enough to just have an idea that works, it’s equally important for them to know that you believe in this idea. It’s probably the most intangible aspect of this discussion, but it’s as important as any other.

The Numbers

Investors, regardless of the type of investment in question, want to know that you have all your numbers figured out. This includes creating a well thought out business plan, among other things.

The Viability

Questions to ask yourself: Is your business idea viable? Is your main selling point intellectually protected? Will there be any potential conflicts with other parties?

The Future

Questions to ask yourself: Is there enough room for growth? How do you plan to scale your business? Will the profitability/viability get affected at a larger scale?

The Proof

Everything you do in terms of proof will count in your favour. From an intensive market survey and proof of concept to purchase orders and testimonials, just to name a few examples. While it’s good to have a business that works not just in theory, it’s not a prerequisite. This eventually comes down to how the promising your business idea is in the investors’ eyes.

The Exit

If you put yourself in the investor’s shoes, you can see why an exit strategy is important. Investors do not generally want to stay on board for decades. They prefer to have an exit window of 5-10 years in which they can make the most of their investment. How you plan on providing them this exit becomes, in this context, an important question.

Angel Investment And Business Stages

As we noted earlier, angel investments are best suited for start-ups that are in their early stages of development. There are three main business stages that are most likely to secure angel finance.

Pre-Revenue Stage

This is the earliest stage for an investor to come on board. Pre-revenue businesses generally have not much to stand on except the power and potential of the idea. It helps if this idea can be/is intellectually protected, has obvious benefits and is proven to work in real life. Quite naturally, pre-revenue angel finance is fraught with risks, and investors may want a sizeable share of equity for their money.

Pre-Profit Stage

Pre-profit businesses are the ones that have already set up shop (so to speak) and started trading. The revenue they generate isn’t enough to cover their expenses and debts. At this stage, investors have enough evidence to visualise the profitability.

Post-Profit Stage

Post-profit businesses are the ones that have not only started trading but also gone beyond the break-even point. Such businesses rarely look for angel finance, but when they do, they have a very good chance of securing it.

Commercial Finance Network and Angel Finance: How We Can Help

As a leading whole of market commercial finance broker, Commercial Finance Network is best placed to match your business with angel investors who can offer invaluable industry experience, funding and expertise. Our panel of private investors consists of UK-wide angels with years’ worth of investing experience. When you work with us, we make sure that your ideas – they may well be the next big thing – are placed in front of the right investors. Angel investing is not just about money, it’s about the priceless experience and expertise that can make all the difference in the world. To know more or to request a call back, call us on 03303 112 646. You can also fill in this short online form to get started.