The alternative finance industry was worth £3.2bn last year, according to the Pushing Boundaries report by Nesta. However, many micro, small and medium-sized enterprises – 56pc – remain in the dark about the range of non-traditional fundraising methods available. So what are the alternatives to bank lending and how can you choose the right one for your company? Rahul Parekh, co-founder of online meal-delivery site EatFirst, says there are two main routes a start-up can choose to follow when considering initial funding. The first is self-funding (or the bootstrap model) – borrowing from friends and family. The other option is to source a form of capital that will provide enough money to grow and scale the business. He explains that if you have a low cost base and very early revenue stream, most start-ups will go for the self-funding option. The focus in a bootstrap business is making the company profitable as early as possible and taking it from there. But that wasn’t going to work for EatFirst. Mr Parekh says: “We had to invest in a kitchen and delivery operation, as well as hire top chefs, such as Roka’s Benn Hodges, to become ambassadors for the business. We also wanted to get a great team around them. To do that you need to have some capital.” It was clear for Mr Parekh that bootstrapping wasn’t going to work. Investors help you build useful connections with other companies, suppliers and contacts To find the seed funding he needed to realise his vision for the business, Mr Parekh approached venture capitalists (VCs, typically larger firms) and business angels (individual investors). Both are tried-and-tested means of sourcing finance in return for an equity stake. The investment EatFirst secured from its first VC allowed it to launch online, set up a team and start testing its product in London. As the company began to grow, Mr Parekh again reached out to more VCs and angels, who bought into the idea. EatFirst now has five investors on board. Thanks to their help, the food tech company was able to raise around €8m (£6.7m), helping it continue to grow. Mr Parekh claims one of the biggest advantages of funding a business in this way is the expertise and knowledge investors bring to the table. “They often have a portfolio of businesses similar to yours that they have previously invested in. They can provide advice on how to successfully grow your business, as well as help you build useful connections with other companies, suppliers and industry contacts.” A trap many small business owners fall into is worrying about how much equity they are giving away in exchange for investment. Mr Parekh believes the strategic expertise and networking opportunities offered by business angels and VCs makes the trade-off worth it. Alternative finance expert Luke Davis agrees, claiming that “a smaller piece of a bigger pie is often better”, particularly if you’re a micro-business or a sole trader. He advises smaller entrepreneurs – who may be looking for relatively tiny amounts of funding, for example, £50,000 to £70,000 – to attend Dragons’ Den-style pitching events, where they can sell their service, product or invention to angel investors. Mr Davis, the chief executive of private equity firm IW Capital and co-founder of crowdfunding experts Crowdfinders, has successfully raised more than £100m of capital to support the transformation of businesses such as BorrowMyDoggy, WeSwap, Brewhouse & Kitchen and Square Pie. He’s also the co-founder of peer-to-peer lending platform Money&Co. With peer-to-peer lending platforms you can get the cash very quickly Peer-to-peer (P2P) lending matches private investors or businesses with borrowers who are either business-to-consumer (B2C) or business-to-business (B2B) companies. The main draw for borrowers is the speed at which they can access funds. Mr Davis explains that the average maturity of businesses using Money&Co is seven years, so these are established, profitable companies. He says: “For these companies, the revenue is heading in the right direction; you’ve got historical trading figures on which to take a credit decision. But maybe they can’t get the money from the bank, maybe they don’t want to get the money from the bank or maybe the terms for the cash are too onerous. “Speed-of-cash is often top of the agenda for these entrepreneurs, because they always need the money yesterday. With P2P platforms you can get through the paperwork and get the cash into your account very quickly.” Invoice trading is another popular route for business owners looking to get cash quick. The process involves SMEs (sellers) auctioning their invoices online. They can sell them individually or in bundles to the bidders (buyers) who offer the most competitive price to advance them the money. Sellers then buy the invoice back from buyers and can decide whether to do so after 30, 60 or 90 days. Caroline Langron is managing director of Platform Black, an online finance marketplace for SMEs of all sizes. Its smallest trade is £5,000 and its biggest line is £8m. She says: “We go from one scale to the other, but the principle is the same – we want a SME or business that is trading and has a debt that we can finance.” Like many alternative funding options, invoice trading is about speed and flexibility. Langron claims this is the secret behind the rapid growth of non-traditional methods of financing businesses: “The alternative world has been able to expand because it has been more flexible about what the SME wants – the flexibility to be able to use the money when they want it.” Do you have a finance tip to share with the community? Email anna.isaac@telegraph.co.uk