Putting Up a Business?
How to Get Money When the Banks Won’t Lend

Today’s business cycle has really become somewhat unusual. Major banks and financial institutions in general offer low interest rates on their savings and deposits and still there’s limited credit available. How can there be insufficient credit available to startups when banks are offering low interest rates on savings? It doesn’t make sense at all.

Major banks are hoarding cash reserves and making too many excuses not to lend, that’s one of the answers to the question above. According to Federal Reserve’s records (US), it currently has trillions of dollars of bank’s money in its balance sheet and that’s no different with our UK banking system too. And it is very favourable to these banks to keep their money there because they only pay a small amount of interest every month for it.

This kind of practice is obviously not good news for new startups and provides challenges for people looking to start up a business in today’s climate. Typical the main banks will claim it wants to keep the banks’ lending while being paid to keep their cash all locked up. Traditionally, banks are the go to institutions when lending money but because of the main banking schemes (or agenda), they are no longer doing their job or meeting the needs of business entrepreneurs. This means that banks no longer have to risk their money in an uncertain economy and market.

So what can entrepreneurs do right now to get hold of some much-needed cash? Let’s find out.

Angel Investors

Nowadays, only a few people want to save money, especially in cash, when there’s almost zero interest rate. Having said that, it doesn’t necessarily mean that they don’t want to preserve their wealth, actually, they do.

This is where angel investors come in. These are the kind of people who want to preserve their wealth through investing in comprehensive business ideas. They usually want an equity share or position in the company in return for their investment and this may mean that the company has to give up a degree of control.

Knowing about this, it’s not necessarily bad news because it may actually work out to your advantage. Why? These investors mostly are people who have a great knowledge with experience and may have had a lot of success in your particular industry. In fact, many angel investors quit their regular job just to look for new business opportunities. They know about the details of the sector and other than investing money in the company, they can also offer guidance and advice on what will likely work and what won’t.

Usually, the biggest problem is finding suitable angel investors. But nowadays, thanks to the internet and social networking, they’re easier than ever to find and contact. Now, many websites have been created to make contact and transacting with angel investors a lot easier. In some instances, an angel investor can even be either a family member or a friend.

But it is not easy to get an angel investor on board because you will have to jump through several hoops when completing various tests and applications  in getting their commitment. A typical angel investor will be looking between 15 to 25 potential candidates per month. It only means that you are competing with others and have to persuade an angel investor that you have an amazing, viable project to get their funding. Normally angel investors will engage between one to three deals per year, worth anywhere from £25,000 to over a  £1,000,000.

Crowdfunding

Not until recently that companies such a Kickstarter, recognised the possibilities of using the internet as a source for financing and offering a collective way to lend and borrow funds. But this has been around for quite some time now (as early as the 1990’s) used by a select set of individuals lending and borrowing between organised and sophisticated groups.

There’s no question on Kickstarter’s success right from the start. It financed some of the most exciting video games, artists, and appeals. Many of these projects would never have got any financial supports by the traditional means of a main bank.

Probably the most surprising thing is the size of the crowdfunding scene and the effort put into this business. Upcoming games such as Star Citizen have gathered over a $100 million funds. This only means that if Kickstarter companies have an eye-catching idea, they can draw as much capital as the biggest studios.

Having no gatekeepers is an important advantage. The crowd literally pays for what it wants to be produced in the future, without the help of a middleman like banks and investors. But it doesn’t necessarily indicate that Kickstarter has a smooth ride along the way. Sites like www.heartrepreneur.com/success-and-failure-on-kickstarter/ tackles some of the common issues faced in this business.

The thing that generates the most success is having a great story. The company behind Star Citizen told a tale of how gamers could expect one of the richest open world experiences in gaming history and gamer’s desperate for such an experience, stumped up the money. The idea is to generate as much enthusiasm as possible for your product. And if you have a truly worthy idea, it should be enthusing.

Peer-to-Peer Lending (Loans)

Peer-to-peer loans are exactly what you might imagine and similar to the other examples we’ve looked out, traditional financial institutions are taken out of the picture. People lend directly to each other, usually through an internet transaction with some given description.  It’s a bit different to Kickstarter, in the sense that financing isn’t crowd-sourced. You won’t be attracting the masses instead you’ll be appealing directly to a potential investor/lender online and may be a lower entry point and a less riskier model offering a fixed rate of return with perhaps some sort of security too.

Once you’ve sent your proposal, this will be reviewed first by the peer to peer facilitator who then invites potential investors (once approved). If the offer taken out by the borrower is confirmed, you then will pay the investors through monthly loan installments, paid through the platform.

Currently, the concept of peer-to-peer loans is growing in the US, UK, Europe and now into Asia. The Federal Reserve in Atlanta conducted a study and found that roughly 20% of businesses had lent funds using this method (2014) and that the approval rates on those loans were higher compared to traditional banks.

In some ways, P2P lending is actually better than borrowing from the banks. Normally the loans are more flexible and the costs like the rates and fees are lower compared to banks. As time goes by and banks continue to hold on to their cash, we can expect the ever greater embracing of P2P lending.

However, the need of a good credit score is one of the important things that you have to remember. It’s the same process as when you go for a loan at the bank, your credit score (as well as other important documentation) will be the basis as to whether you’ll get a loan and what rate of interest you’ll pay. So it’s advisable to improve your credit score first before engaging in a loan.