Entrepreneurs have a limited knowledge of alternative finance that could be holding back their ability to grow their businesses, according to new research.
With the growth of peer-to-peer lending and crowdfunding, too few entrepreneurs are taking opportunities that could take their ideas up to the next level, says financial firm Aviva.
In a study, entrepreneurs were asked about their knowledge and experience of raising money for business.
From the results, Aviva calculates around 2 million small businesses need start-up or development capital over the next six months.
Generally, a third of entrepreneurs have no idea how to raise the cash if they are rejected by a high street bank, but this rose to 80% of sole traders.
Better rates and terms
Four out of 10 expressed a preference to work with their bank, but only 22% admitted they would look at alternative funding sources, while 75% felt the option was too risky.
Many entrepreneurs felt they needed to know more about new funding sources like crowdfunding and peer to peer lending before they could take money from an online platform.
However, 50% of entrepreneurs who had raised money away from their banks agreed the rates and terms were better, while the process of raising money was also less strenuous.
The survey found entrepreneurs looked for cash from various sources, including:
- Business loans or grants (28%)
- Peer-to-peer funding (27%)
- Investment or equity funding (26%)
- Money transfer (20%)
- Asset based finance (19%)
- Family loan/investment (17%)
Entrepreneurs were also unaware of how to apply for the right funding for their business because they did not know the difference between debt and equity finance.
SEIS advantages
Equity finance – where investors offer cash in exchange for shares in a company – is repayment free and can give investors generous tax breaks through the government backed Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
Investors make a profit from dividends or the sale of shares as the company increases in value.
Debt finance – a loan from a bank or peer to peer lenders – involves regular interest and capital repayments that can negatively impact on cash flow at a time when a business needs the money most. Debt finance also needs some form of security to back the loan.
Robert Ledger, head of small business at Aviva, said: “Entrepreneurs often make high street banks their main source of funding. With the rise of alternative finance, especially crowdfunding and peer-to-peer lending, business owners have to seek a broader understanding of what’s available, especially if they are knocked back by a bank.”
