Three Unconventional Methods of Funding your Business
The natural fluctuations in the economy mean there are times when conventional credit markets become tight. In these instances, rather than giving up on the idea of credit and letting an opportunity pass you by, there are alternative, less conventional sources of finance you should turn to. The recent credit crisis that devastated traditional credit sources made businesses more innovative in the way they access credit, spawning new opportunities that your business can take advantage of today.
One of the main obstacles to accessing credit from traditional sources is your business’ credit profile. There are There are several free company checking websites in existence which allow you to keep abreast of your business’ credit rating, and, if it’s poor, find ways to improve it. By checking your profile once or twice a year, you can ensure your credit profile is moving in the right direction on the back of positive actions such as meeting agreed payment deadlines. However, there are also methods of borrowing which are less reliant on a positive credit profile, in a way the business equivalent of a Wonga loan. Let’s take a look at some of these less conventional sources of business credit.
Factoring
Far from being innovative, factoring is actually one of the oldest methods of financing a business from within. “Factoring is a financial transaction in which a business sells its accounts receivable to a third party at a discount” (Source: Wikipedia). So, in practice, if you were owed £50,000 for some work your business had completed, but the invoice wasn’t due for another six months, you could effectively sell the invoice to a factoring company for 80 percent of its value, i.e. £40,000, and receive the money upfront, rather than having to wait the full six months. This is a great way of releasing the capital tied up in unpaid invoices to help businesses regulate their cash flow and take advantage of opportunities as and when they arise.
Hedge-fund lenders
Hedge-fund lenders are traditionally less risk averse than more conventional sources of finance such as banks. Whilst high street lenders might shy away from an investment in high risk businesses such as start-ups in the technology sector, hedge-funds are more prepared to back these businesses with the hope of higher returns. The benefits of hedge-fund borrowing are the large amounts of money available, often very quickly. However, this can also be to the business’ detriment, as such a high level of gearing often attracts high borrowing costs and penalties if the business begins to falter on its payments.
Peer-to-peer lenders
A peer-to-peer lending agreement is one made between a business owner and their friends, family or strangers who believe the business will be a success. The pros and cons of such an agreement are plain for all to see. Obviously this type of agreement may allow a greater degree of flexibility in regard to repayments than a conventional agreement with a bank, and the money can be accessed quickly. However, there are few situations when the maxim “never mix business with pleasure” rang so true. Personal issues can all too easily become intertwined in the lending agreement. Friends or family members may expect non-financial kickbacks such as employment if the business does well, or a stake in the business further down the line. So, although the relative informality of such an agreement can seem like a boon, this can all too quickly come back to bite you.
Are there any other unconventional methods you have used to fund your business? Perhaps you’re considering one of these three approaches but would like to share your concerns? Either way, we’d love to hear from you, so please leave your thoughts in the comments sections below.
Share this:
Category: Business, Business Debt
