How to Raise Money for a Business Without a Loan
Fortunately, there are many other options available and some might not even be that apparent at first thought. This, ultimately, means that when you want to raise money for your business, you’ll have quite a few options to consider, each with its own advantages and disadvantages.
With that in mind, we’ll now deal with some of these options in more detail and show you how to raise money for a business without a loan.
Obviously, if you have money saved up in your bank account, your best option would be to use that to fund your business. The benefit of this is that you won't owe anyone anything and you wouldn't have to pay any interest which means, in the long run, you'll save a lot of money. Fortunately, this also means you have no risk.
2. Bootstrapping your business
If you don't have any money saved up or you don't have enough, your next best option would be bootstrapping your business. Basically, with bootstrapping, you’ll make a small investment into your business and then fund it as you operate. In other words, you’ll use the money you earn to fund your business.
In this way, you don't have to obtain a loan to fund your business and you don't have to approach investors for funds. This, in turn, gives you full control over your business. Another benefit of bootstrapping is that, because you're totally reliant on income from customers, you’ll make them more of a priority. As such, you’ll focus on effective marketing and stellar customer service which will always serve you well later on.
3. Family and friends
Another option when you're considering ways on how to raise money for a business without a loan is borrowing money from friends and family. One of the main benefits of doing this is that family and friends are often more flexible when it comes to interest rates. This means you’ll typically get more favourable lending conditions compared to a traditional bank. Also, the process of obtaining funding from family and friends is a lot quicker.
The obvious drawback of obtaining funds from family and friends is that it could lead to damaged relationships if things go wrong. As they say, mixing family and friends with business could be disastrous.
Crowdfunding has become increasingly popular in recent years and it's a great way to get funding for a business without getting a loan. With crowdfunding, investors will contribute small amounts of money to your business which then all adds up to sufficient funding in the end.
What typically happens with crowdfunding is that you'll put a description of your business, products, or services on a crowdfunding platform and then also mention your goals, how you’ll make a profit, and how much funding you’ll need. Investors can then read about the business and provide money if they like your idea. They’ll typically do this by pre-purchasing a product or giving a donation.
One of the benefits of crowdfunding is that it can raise substantial public interest for your business or product. Simply put, you’ll get marketing for free if your crowdfunding campaign is successful. One of the drawbacks of crowdfunding is that, due to its popularity, it's become very competitive. This means you have to have an excellent business idea or product in order to get the attention of investors.
Another option to raise funds for your business without getting a loan is by getting investors to invest in your business. Here, one of your options would be angel investors. These are investors with surplus funds available that want to invest in growing businesses. The drawback with angel investors is that they typically invest lesser amounts compared to other investors like venture capitalists.
And speaking of venture capitalists, this is also an option. However, they tend to focus on businesses with huge potential and, as a result, they’ll often want to make a return on the money quickly. So, you should consider whether it's the right option for your business.
When it comes to investors, another option is tax incentive schemes that the government offers. Here, the enterprise investment scheme and seed enterprise investment scheme are well-known examples. When investors invest in your business, they'll get a tax incentive back. This makes it an attractive option for them. The drawback of these schemes is that they have stringent requirements that you’ll need to meet in order to qualify.
5. Bank overdraft
Offered by traditional banks, bank overdrafts can also be an option for you to fund your business. With an overdraft, you’ll be able to spend more than what’s available in your bank account and, for this privilege, you’ll pay interest to the bank.
This is probably one of the main drawbacks of bank overdrafts. They’re typically meant to be a short-term funding option and, as such, banks generally charge far higher interest on overdrafts compared the traditional bank loans. This doesn't make them ideal as long-term financing options. Another drawback is that overdrafts are payable on-demand which means the bank can demand full repayment of the overdraft at any stage.
7. Business grants
Business grants can be a good option if you're selling a revolutionary product or if you want to raise funds for a business in a specific industry. A benefit of business grounds is that, obviously, there are no re-payments and it's basically free money. However, because they typically only offer funding for businesses in a particular industry or that deliver groundbreaking products or services, they’re challenging to qualify for.
For example, the government’s R&D grants are its way to reward innovative companies and can be awarded as a cash lump sum or as a reduction of a company’s tax liability. However, as mentioned, there are stringent requirements that you’ll need to comply with.
8. Invoice finance
Another viable alternative to bank loans is invoice financing. With it, every time you issue an invoice, a factoring company will pay you a percentage of the invoice. They'll then recover the payment from your customer. So, for example, if you issue an invoice for £ 500, the factoring company might pay you £ 450 pounds and then recover payment from your customer. Once the payment is recovered, the factoring company will take its fee and then pay you the remaining balance of the invoice, if any.
One of the benefits of this is that you’ll get paid for your invoices immediately, albeit for a slightly smaller amount. The drawback is that, in some cases, you might pay more than you would when paying interest on a loan. Another drawback is that, as the factoring company will deal with your customers, it could damage some valuable relationships.
9. Business cash advance
Business cash advance services weren't launched so long ago but they have become increasingly popular as a way to fund businesses across the UK. In essence, it works like a bank loan but without fixed monthly payments.
With these advances, a lending company will advance cash to you and then recover the loan by taking a percentage of your card sales. You then, usually, have to pay a minimum repayment over a specific period. For example, the minimum repayment might be 10% every three months. If you do, your repayment will be variable which means that you’ll pay back an amount based on what you make. This, in turn, makes it easier to plan and budget.
10. Peer-to-Peer (P2P) lending
Peer-to-peer (P2P) finance is a newer form of finance. You can almost think of it as a specialised type of crowdfunding where people pool their money together to provide funding to businesses. It's called peer-to-peer funding because the funding comes from ordinary people like you instead of a bank.
A major benefit of peer-to-peer funding is that there’s a lot less red tape. So, the process to apply for funding is a lot faster than traditional finance and you'll be approved and get your money a lot quicker. Keep in mind, though, that peer-to-peer lending often has the same type of requirements as typical bank loans.
To sum up...
Hopefully, this post showed you how to raise money for a business without a loan. In many of the cases mentioned above, you’ll need financial statements to prove your income and your ability to pay back a loan or demonstrate to investors that they’ll get a return on their investments.
And that’s where Accountancy Cloud comes in. With our outsourced finance teams for startups, we will get you organised. We’ll help set up your full finance stack for scale, including preferred cash–sweep accounts, payroll, and expense management. We’re your trusted partner.
To find out more about Accountancy Cloud and how we can help you, contact us today to discuss your needs and requirements.