How to raise capital with alternative finance for small businesses

When it comes to raising capital, small businesses and start-up SMES can be seen as a higher investment risk. Add to this the numerous costs to contend with – from legislation around wages, pensions and apprenticeships to business rates and late payment fees – it is no surprise that it can be challenging to secure investment with traditional bank-finance methods.

As a result, alternative finance such as asset-based lending, invoice finance, peer to peer lending and crowdfunding are all growing in popularity as SMEs look for more accessible funding.  But what’s the difference between the main types of alternative finance?

What is asset finance?

With asset finance, new and used business assets – from machinery to IT equipment – can be financed through leasing and hire purchase, and a choice of specialist alternative finance lenders offer this option.

It can also refer to asset refinance, where loans can be secured for small businesses using the value of their tangible ‘assets’.

What is invoice finance?

If a small business trades on credit and has large outstanding invoices, a lender can purchase your unpaid invoices to help improve cashflow. As well as providing an up-front payment, once the customer pays the invoice the business receives the outstanding balance, minus the lender’s fee.

What is crowdfunding?

With crowdfunding, an online platform connects business in need of finance with a number of people who are keen to invest. To ensure the agreement is mutually beneficial, the investors usually receive a small amount of equity in the company, which is why this is sometimes called ‘equity crowdfunding’.

What is peer to peer lending?

Much like the above, this alternative finance option connects small businesses with investors, providing easy access to capital.  With peer-to-peer lending, investors usually lend money in exchange for interest on repayments.

Alternative finance for small businesses

While some companies are increasingly confident in these non-bank finance options as a reliable and affordable way to raise capital, many small businesses still aren’t aware of the possible benefits.  Likewise, many SMEs are not familiar with some of the government tax breaks that exist to support their growth.

Small business investment tax breaks

For instance, there are two government venture capital schemes which are designed to encourage equity investment in unlisted UK businesses.  The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) both provide tax incentives for investors, rewarding them for taking the risk on small companies.

By taking advantage of these schemes, small businesses can increase their chances of securing investment, whether to cover start-up costs or development, or simply to protect and maintain their cashflow.

Government venture capital scheme advice

To support small businesses, the experts at Clear Vision can offer advice on crowdfunding and alternative finance solutions to confirm eligibility for government venture capital schemes. Through accounting and tax consultancy, looking at the business’ current tax position and even completing required tax returns, an SME’s investment proposition can be enhanced.

With the Clear Vision alternative finance service, business owners receive support through the application process, with accounting and tax experts dealing with HMRC on the company’s behalf.  This can help ensure that businesses receive Advance Assurance under their chosen scheme – that is, HMRC will advise whether if an investment was to be made that it would meet the qualifying conditions.

For advice on alternative finance for your small business or to discuss other SME accounting and tax services, get in touch.