Financing a start-up without a bank loan

Finance expert Keith Tully has some advice on how to finance your business without a bank loan.

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As an entrepreneurial working mum looking to inject life into a business plan, the first step is to raise finance to spur the idea into full bloom. Having secured finance, you will be able to determine the scale of your business operations based on affordability, forecasted costs and reserve funds. Keith Tully, partner at Real Business Rescue, provides tips on how to fund your business with alternative finance over the traditional bank loan.

Securing finance can help determine how much capital you will have to run your business as, without the desired amount, you will have to cut back on business costs, expenses and plan a cost-efficient strategy to help you earn a profit.

The traditional manner of raising finance to launch a new business is to seek the support of family members or to turn to your local bank. In an era of developing artificial intelligence, automated applications and flexible finance platforms, it is easier and quicker to access alternative finance.

As a result, finance providers are able to provide more competitive terms and flexible security agreements in comparison to a bank loan. The chances of qualifying for this type of finance for contractors and freelancers may even be higher.

We talk you through a handful of different forms of alternative finance which can be used to fuel your business.

Specialist start-up loan schemes

A government start-up loan can be accessed to obtain funding for start-ups or those looking to grow their business.

The loan is an unsecured personal loan which ranges from £500 to £25,000 with a fixed yearly interest rate of 6 per cent.

In order to qualify, you must be a UK resident, aged over 18 and intend to start a UK trading business, or already have a UK trading business of fewer than 24 months.

The average loan is £7,200 which could inject your business with some much-required capital and, if successful, you will receive 12 months free mentoring.

Similar loans from Virgin Startup Investments and independent brokers are also available for those looking to raise funds to start their business.

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If you believe that your business idea can garner mass support from the community on your doorstep, across the country and globe, make a public plea for funding through a dedicated crowdfunding platform.

Many crowdfunding sites have helped turn the fate of unestablished businesses by giving them the opportunity to raise finance, eventually bolstering them into million-pound enterprises.

Crowdfunding is essentially receiving donations from ordinary individuals and interested parties on a global scale to fund your project, prototype or business idea.

Donors are sometimes given an incentive for their financial contribution. If the investment is of significant monetary value, the donor is typically given a stake in the business or partial rights.

Angel investment

Angel investment is equity finance contributed by an angel investor which is typically a high net worth individual investing personal money or on behalf of a profitable fund.

Angel investors typically fund entrepreneurs if the start-up is of high growth potential and the business idea has gained positive interest from prospective customers.

They bring their experience, understanding of the industry and knowledge to the active role of personal mentor to the entrepreneur. The angel investor will typically seek a return from their investment over the long term, typically a series of years.

Alternative finance

Non-traditional finance, such as invoice discounting or invoice factoring, can be used to unlock funds due from customers. By receiving payment in advance, you will be able to use the money to reinvest into the business, pay staff wages and bills. Different types of invoice finance options allow you to choose how to manage your relationship with the end client.

Once your start-up has developed into a larger outlet, you may qualify for corporate finance and find tools such as mergers and acquisitions useful to enter new sectors and attract additional business partners, creating a stronger appeal to investors and business partners.

By widening your options in terms of finance, you will be able to give your business the best chance at succeeding. A traditional bank loan may be easier to access due to your existing relationship with your banking provider.

However, it may be easier to communicate directly with a finance broker or a lender who is a specialist. By establishing one port of communication without the fuss of a central call centre, you will able to work efficiently and establish a clear operational timeframe.

As a work from home parent, each second counts, which is why the option with the best communication, speed and competitive results will make for a key contender.

*Updated in October 2023.

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