Nearly 2 million businesses want money to invest over the next six months, but few are aware of the available funding options.
Research by financial firm Aviva shows a third of entrepreneurs do not understand alternative business finance options, and 29% were unaware the funding options were available.
Sole traders were the least aware of how to raise cash to grow their businesses. Around 80% confessed they did not understand or were unaware of their options.
Only a fifth of entrepreneurs agreed they would look at alternative finance for their business, while 40% said they would rather deal with a high street bank.
Nearly three-quarters steered away from alternative funding as they feared funding would be too risky for their business.
Tax breaks
Of entrepreneurs who had sought alternative finance, half said they picked up better rates and more flexible terms than their banks offered and a third found accessing the cash easier than asking a bank for a loan.
The study also listed the most popular alternative finance options for entrepreneurs:
- 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%)
Although some entrepreneurs were well-versed in funding offered by peer-to-peer lending and crowdfunding, many felt they needed to know more information about how they worked before committing to a deal.
Similarly, many entrepreneurs were unaware of the tax breaks offered by the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS).
Financial planning
SEIS offers income tax and capital gains tax reliefs to investors in start-ups, while EIS gives income tax relief to investors in expanding companies.
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.”
Ledger explained entrepreneurs need to work out a financial plan so they can target how the funding will be spent and what they can offer as security for the borrowing.
“The choice then becomes between debt funding and equity funding,” said Ledger. “Each has a very different effect on the business. Equity funding gives an investor a return through growth in the value of the business, while debt funding impacts on cash flow with interest payments.”
