“Q: Where’s my trusted bank manager gone? And who do I go to find the funding I need to support my small business?”
Go back a few decades and your bank manager was your first port of call when you needed extra capital to grow your business.
But fast forward to the 2020s and that cosy relationship with your bank manager has all but disappeared. High-street branches are disappearing, relationship managers are hard to track down and the main points of contact are all via chatbots and online forms.
So, what does a small business owner do when they need extra capital?
“A: The big banks have lost their connection to the small business community. So, when you need to have that funding conversation, you’ll need to look further afield than your local bank manager.”
The major banks see lending to small businesses as a risky prospect. So, you’ll need an excellent business credit score and impeccable financials if you want to apply for a bank loan, overdraft or any kind of startup finance.
For many businesses, where your credit score is less perfect and your revenue predictions are less stable, other routes to funding will be more successful than going to the big banks.
Here are four funding routes to consider
1. Fintech, alternative lenders and non banks
There are a growing number of ‘non banks’ that specialise in lending to small businesses. You can choose from invoice financing, short-term loans and access to additional credit.
Pros: You can get ultra-fast online approvals (often within hours) based on real-time banking data and cashflow, rather than requiring a flawless credit score.
Cons: Most loans, financing and credit will have higher interest rates and shorter repayment terms than traditional bank loans.
2. Crowdfunding platforms
Crowdfunding platforms allow you to connect directly with potential customers so they can pay up front for your products at the MVP stage – providing the funds to go into production.
Pros: Validates your product in the market and builds a loyal community of advocates without taking on debt or strict financial vetting.
Cons: Demands massive marketing efforts; campaigns are public and fail if your funding targets aren’t fully met.
3. Private investors (angel investors)
Angel investors are private individuals with the wealth needed to invest heavily in your business. You also get the potential bonus of the experience and connections of your angel investor.
Pros: Provides you with flexible capital alongside valuable industry mentorship, networks and expertise, but without a salary obligation for your angel.
Cons: Requires you to dilute your ownership stake and give up a degree of day-to-day operational control over the business.
3. Private equity (PE) and micro-PE companies
Large and small private equity companies will be keen to invest in your business, as long as you have the evidence to prove your future performance and revenue generation capabilities.
Pros: Offers substantial capital injections and professional management backing to help expand your operations and scale the whole business.
Cons: PE companies will typically target more established businesses and demand significant equity, with a strong focus on their exit strategy and return on investment (ROI).
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