Banks are no longer the only game in town. A host of new firms have sprung up offering small businesses an alternative route to finance. Kate Bassett looks at six of them.
CrowdCube
Think of Crowdcube as an online version of TV's Dragons' Den. Budding entrepreneurs upload their pitch to the website, stating how much money they're looking to raise and how much equity they're prepared to give away. They then use the power of social media to drum up interest. Founded by Darren Westlake and Luke Lang in February 2011, the website has 11,000 registered "armchair investors" who can invest as little as £10 per company. Fourteen businesses have secured seed or growth capital through the platform to date, between them raising a total £2.6 million. There are no administration fees for the entrepreneurs or investors; Crowdcube simply takes a 5% commission on each successful fund-raising. If a business owner fails to reach his or her predetermined target within 90 days, money is returned to investors.
Who's used it: Fairtrade bodycare company Bubble & Balm, and bar operator The Rushmore Group.
Funding Circle
Set up by Samir Desai, James Meekings and Andrew Mullinger in August 2010, Funding Circle is an online marketplace connecting small firms to individuals with cash to spare. "There are no middlemen, no banks and no lengthy delays," says Mr Meekings. Businesses have to be at least two years old and must be approved by Funding Circle's credit assessment team, drawn from the ranks of ex-bankers. Those small and medium enterprises (SMEs) that pass muster can then borrow between £5,000 and £75,000 at around 7-9% Firms get hold of the money within two weeks. Since its launch, more than 650 businesses have borrowed a total of £26.7 million through the site. Backers include Jon Moulton of Better Capital, Edward Wray of Betfair and Carphone Warehouse's Charles Dunstone.
Who's used it: Brighton-based coffee house Ground and digital print firm Landor
MarketInvoice
Imagine you've sent your client an invoice for £100,000. They're due to settle the bill in 90 days, but you can't wait that long because your suppliers need to be paid within 30 days. What do you do? You could turn to MarketInvoice. The website, launched last year by investment bankers Anil Stocker and Charles Delingpole, allows businesses to sell outstanding invoices to institutional investors, asset managers and high net-worth individuals. Here's how it works: you post an invoice in an auction and investors bid competitively to "buy" it, offering an advance rate against the invoice face value (usually 70-90%) and setting their fee (0.75-2%).
MarketInvoice takes a 0.5 per cent cut. Cash is advanced to the business immediately. "This is a solution to the problem of small companies trapped in a 'double credit crunch' between banks who won't extend overdrafts and their large customers who delay payment for long periods of time," says Mr Stocker. MarketInvoice has so far channelled £8 million of finance to SMEs with a 0 per cent default rate.
Who's used it: Designer shoe firm Lisa Kay Shoes and TV production company Connected Pictures
Borro.com
Boudicca Scherazade is an antiques buyer based in London. When she needed cash to buy products at an auction in the South of France, she decided to pawn her gold Rolex and Cartier bangle on borro.com for £4,000. She's not the only business owner using the online pawnbroking site to secure short-term loans. Unable to meet the ever-stricter lending criteria set by banks, more and more wealthy individuals are choosing to release equity from their jewellery, luxury cars, fine art and yachts.
The company's online model ensures low interest rates and there are no lengthy credit checks; money is secured against the asset, which sits in borro's storage facility until the money is repaid. Chief executive Paul Aitken, who founded the company in 2008 and lists Mark Blandford (founder of Sportingbet) and Paul Gratton (co-founder of Egg) as board members, says loan requests from business owners rose by 85 per cent in the first half of 2011 compared to 2010. The average loan value is £3,500 for consumers and £17,000 for SME owners.
Who's used it: Property developer Francine Levinson and building contractor Steve Roche.
Peoplefund.it
This is the new kid on the block. Launched in December 2011 by media-production company KEO (of River Cottage, Hugh's Fish Fight and Chicken Out! fame), Peoplefund.it is a crowd sourcing website with a social mission. It aims to help people with business ideas that "might just change the world". Entrepreneurs post a three-minute video pitch on the site and set a target for how much money they want to raise. Investors can then pledge money (from £1 up to £500), time and skills in return for "rewards". An organic bakery might offer a box of cakes in return for £20 or a cookbook in return for £40, for example. Listings are free and Peoplefund.it takes a 5% cut when the target is reached. Nearly £100,000 has been raised through the site so far.
Who's used it: The Bike Academy and FoodCycle's Community Café.
Indiegogo
Established in January 2008, San Francisco-based IndieGoGo wants to "democratise fundraising". Chief executive Slava Rubin says: "IndieGoGo is totally open and doesn't require an application to start a campaign." IndieGoGo accepts almost every project sent its way, whether it's a rock album or a liver transplant. The firm gets revenue by taking a percentage of the money that's contributed. If you create a campaign and meet your stated goal, then IndieGoGo charges 4 per cent; if you don't meet that goal, IndieGoGo charges a higher 9 per cent fee, but you get to keep the remainder of the money. Since launch, more than 70,000 campaigns have been listed on the site across 212 countries, the most popular markets being the US, Canada and the UK.
Who's used it: 3D printer firm eMAKER and the film-makers behind The Real Social Network.
This article orginally appeared in a special report on Funding Britain's Growth, produced by Raconteur Media and published with The Times (UK). For further content by Raconteur Media click here.