Alternative funding: what’s beyond the banks?

Sourcing funding is often the most significant and possibly the most difficult decision any owner can make in the life of their business. Finding the right funding partner is critical for SMEs seeking capital to further their growth plans.

By John Davies, investment director, Seneca Partners.

Bank funding is no longer the default option. SMEs raising finance don’t automatically think of banks as their first port of call. There are a multitude of additional funding options open to them. The development and availability of alternative funding has given ambitious SMEs access to a more comprehensive range of avenues to funding. There are now various flexible and tailored solutions with the capacity to meet their individual needs.

That said, even the best SMEs are still finding it a challenge to source the finance they need. The provision of capital to growth companies is readily available but owners and managers don’t always know where to look. There is still a significant knowledge gap when it comes to understanding the diverse range of funding options available in the market for SMEs.

The list of funding options is lengthy and can be intimidating. Venture capital, angel investors, banks, peer-to-peer, invoice financing, crowd funding, accelerator programmes and asset-based lending. And this is only a selection. There are many more.

SMEs increasingly recognise that tailored funding arrangements may serve their needs better than a standard bank loan or overdraft. The alternative world of finance has been able to expand so successfully because it has been more flexible in terms of what the SME wants.

At its routes funding is split into two categories, debt and equity. Debt involves borrowing money to be repaid, plus interest, while equity involves raising money by selling shares in the company. Picking the right one depends entirely on your circumstances, for example, the amount of funding you require or whether you’re prepared to give away equity in your company to raise the funds you need.

If equity investment is under consideration then the trap many small business owners fall into is worrying about how much equity they are giving away in exchange for investment. What many will concede down the line however is that a smaller piece of a bigger pie is often better in the long-term!

One option that hasn’t been mentioned so far is self-funding, or as it’s otherwise known, the friends and family round. Borrowing from those close to us is often the easiest and quickest route to funding but it’s generally used in the very early days of a business as a type of springboard finance. When the time is right, other options offer more flexible capital that can provide a platform for the business to grow and achieve greater scale.

Speed of delivery when it comes to funding is often top of the agenda for entrepreneurs, because they always need the money yesterday. That’s where crowd funding comes in to its own. For the right opportunity they can complete deals extremely quickly but where SMEs miss out is that they don’t benefit as much from the knowledge and ongoing support provided by other funders in the space, such as Seneca. Whilst we can still complete quickly compared to other solutions, the strategic expertise and networking opportunities offered by us and other private equity funders further enhances the trade-off versus crowd funding alternatives.