Finding alternative funding for franchise owners

Despite the rapid growth of the alternative finance sector, doubling year on year since 2012, and now estimated to be funding some £1.74 billion, small businesses are still missing out on getting finance. Paul Mildenstein, CEO of small business funder Liberis, explains why and looks at options that existing and prospective franchise owners should consider.

The fact remains that the banks aren’t lending as much or as often as they used to. Although larger companies are now beginning to access the finance they need, the bank door often remains closed for young and new firms. Latest figures by the Bank of England, showed that net lending to SMEs fell by £128m the last quarter of 2014.

Interestingly thought, banks remain the first port of call for the majority of small businesses seeking funding and a bank loan remains the most popular product choice.

It’s a worrying fact that many small business owners remain unaware that there are other funders out there with money to lend. A recent survey of 1,000 small firms businesses showed that 45 per cent either didn’t understand what alternative funding was or had not even heard of it. The situation is perhaps further exasperated too by lack of research amongst SMEs into funding options.

British Business Bank research has revealed that 40 per cent of business owners spend under one hour research funding.

Anyone looking for funding to buy a franchise or expand an existing one, should explore alternative funding providers. Spawned by the paucity of bank lending, the sector has emerged as a credible substitute. The choice is extremely broad, covering a range of finance models that connects fundraisers directly with funders, often via online platforms or websites.

Business cash advance

Suitable for established franchise owners needing capital, business cash advance is a simple form of unsecured, short-term funding, where you can raise funds by ‘selling’ your future credit/debit card sales. It’s the only funding product linked to cash flow because you only pay back when the business earns. Access to funds is quick and can often be part of a wider finance solution.

Peer-to-Peer lending, also known as crowdfunding

Crowd and peer-to-peer funding networks allow users to secure funding for via a platform bringing investors and businesses together. Applicants create a pitch that is similar to a business plan to attract investment from platform users. Returns for investors include a percentage of profit and/or equity. It’s suitable for start-ups and established businesses.

Invoice trading

Invoice financing allows a business to business supplier to release a large percentage of invoiced work before the customer completes payment. It’s only suitable for established businesses.

Pension led funding

This is a way of unlocking the value in an individual’s pension fund and can work in two ways. One is as a loan from the pension, being repaid with interest and the other is by the pension purchasing non-tangible assets such as intellectual property from the SME and leasing them back to the business. It’s suitable for start-ups and established businesses.

Private equity - angel investors and venture capital With these forms of funding investors take equity in return for investment in a new business or an established one. Venture Capital operators are corporate entities using funds from other investors whereas Angel funders are single or a group of high net worth individuals.

A quick internet search will throw up a myriad of providers whom you can approach directly.