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Raising finance for SMEs: Alternative options to the traditional bank loan (Part 1)

Despite the increasing importance of SMEs to the national economy, traditional avenues of finance, like bank loans, are harder to come by than ever. 63% of SMEs in the EU that apply for a bank loan don’t get the amount they wish.

But thankfully, there are alternatives – In part one we look at three equity based options:

Venture capital funding

  • Venture capitalists invest in businesses with the potential for high returns and a clear exit strategy – those with products or services with a unique selling point, or competitive advantage.
  • Venture capitalists bring a wealth of experience to the business. They are unlikely to get involved in the day-to-day running of the business but will often help focus the business strategy; opening doors to new networks.
  • However, the process of securing the investment can be complex, costly and time-consuming. A detailed business plan is a must. And legal fees will be incurred through the deal negotiation, regardless of what investment is ultimately secured.

Angel investors

  • Business angels are individuals who make equity investments in businesses with growth potential, businesses in the initial stages of development, or in established businesses looking for expansion capital.
  • When taking on angel investment, a business should look beyond the capital they put in. Most angels can bring valuable first-hand experience of growing businesses, and they will look to share these skills, experiences and network of contacts.
  • Angels often make investment decisions quickly, without complex assessments. However, tracking down the right angel can take time.

Crowdfunding

  • The use of equity crowdfunding by companies looking to raise equity finance is becoming increasingly common. In effect it is a means to connect companies with potentially thousands of investors, some of whom may also be current or future customers.
  • Raising equity finance through internet-based crowdfunding platforms can be an alternative to seeking angel or VC finance through more traditional routes – for start-up, early-stage and growth companies.
  • Before putting a pitch for equity investment on a crowdfunding platform, you would need to show that your business is investment-ready. As with attracting traditional angel or VC investment, you would need to produce a business plan and financial forecasts. A business might also include a video summarising the opportunity.

If you would feel any of these options would be suitable for your business, contact us today for a free consultation.