SME Advisors: Explaining alternative finance to you clients
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As a trusted advisor, how can you easily explain alternative finance to your clients?
Whether you’re a lawyer, an accountant or financial advisor for small businesses, it’s highly likely that some of your clients will ask you about raising growth capital through crowdfunding or alternative finance.
According to a recent Hiscox report the number of small companies stating that bank funding has become increasingly difficult to access has risen. One in ten small businesses questioned also said that they are considering crowd sourcing and peer to peer lending as a means to raising funds in the coming year.
As your clients’ trusted advisor you’ll need to know what you’re talking about, which means understanding all the options including crowdfunding and peer to peer (P2P) lending.
An alternative to traditional finance models
Raising capital to launch new products or fuel business growth can be a challenge. Banks often need significant collateral, and angel investors and VCs will often want to be involved in business planning and decision-making of your client’s business.
Crowdfunding and P2P lending both present alternatives that can generate capital, whilst allowing your client to keep control of their business.
Types of funding platforms
Crowdfunding and P2P lending can give your clients a way of raising business capital by offering bonds, equity or pre-selling their product to investors.
There’s a plethora of choice when it comes to funding platforms, with most specialising by raise type and size of business they support:
Startup & seed businesses
Some platforms aim to assist very early stage or seed businesses to get their ideas off the ground such as Seedrs, Crowdcube and Kickstarter. Businesses usually offer equity or rewards to potential investors on these platforms.
These sort of platforms tend to focus on investments from the general public which means they’re not best suited for B2B or non-consumer facing businesses.
Small to medium businesses
There are platforms that cater specifically for more established businesses that need funds upwards of £1 million. They can be effective for both consumer facing and non-consumer B2B businesses needing growth capital.
Reward based crowdfunding
Backers usually give small amounts of money in exchange for non-financial rewards such as products, discounts or advance access to products. Platforms such as IndieGoGo and Kickstarter focus on this type of raise which can be great for seed and startup businesses.
Peer to peer lending platforms match businesses seeking loans with investors who then bid on the terms of the proposed loan. Your client would regularly pay back the agreed interest as well as the initial loan amount once it matures.
This type of platform is helpful if your client is looking for a relatively small amount of funding and can pay it back over a year or two.
There are also platforms which specifically host charitable raises. If your client’s business is non-profit then platforms such as Fundraise.com, CauseVox and Fundly may be better suited to their needs.
How to advise your clients on crowdfunding
Ensure they know the pros and cons before embarking on crowdfunding. Contrary to popular belief it’s not a quick and easy route to funding. Depending on the funding route they decide to take, they will still need to prepare beforehand.
Investors will want to know the risk involved in supporting your client’s venture, which means examining their finances and going through a due diligence process.
CODE’s due diligence is very thorough, it helps us check if your client is fully prepared and investor ready. But regardless of the platform your client chooses, they’ll need to make sure they can answer any financial questions backers may have.
Any type of crowdfunding including debt and equity financing require some level of marketing beforehand.
As their financial or legal advisor they’re not coming to you for your marketing expertise. But it’s certainly worth letting your client know that any raise will require a solid marketing plan and budget before it launches. They’ll also need to be aware of what they can or cannot say when publicising their raise.
Before signing an agreement with a crowdfunding platform your client will need to be fully appraised of what they are agreeing to. Whether it’s rewards shares or bonds, they need to be clear about what they’re offering backers in exchange for funding, and any implications should they be unable to fulfil the agreement.
Is crowdfunding the best option for your clients?
Of course the answer to this will depend on each client. But it’s worth reminding your clients that the principles of attracting alternative finance investors are the same as they are anywhere.
They’ll need a professional pitch, backed up by a coherent business plan. And they’ll need your help to check legal requirements and create forecasts to help illustrate the venture’s potential.
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CODE Investing has entered into a strategic collaboration with City of London Group to originate SME loans
CODE Investing has entered into a strategic partnership with BNP Paribas Asset Management to originate SME loans.
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