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Alternative sources of funding for small businesses in Ireland
By: Damien
05 Oct, 2022
Ambitious entrepreneurs are always looking to grow their business, but might not want to use traditional methods of funding – so what are the alternatives?
When SMEs want to grow, sometimes that growth cannot be funded through profits alone – certainly to achieve the ambitions of the directors at the pace they want to develop. In these cases, outside funding is needed to put the resources in place.
Still one of the most common forms of outside funding for growth is a bank loan. These have been around for centuries and are largely trusted, but bank loans need to be paid back, with interest. Sometimes, understandably, entrepreneurs don’t want to go down that route, especially as interest rates are currently rising.
Other forms of investment involve outside interests such as venture capitalists, taking a stake in a business in return for investing a set sum. Again, while this is popular, it does mean the outside investor can have a say in the running of the business and will look to make an exit, and a return on their investment, in a set timescale. Often, entrepreneurs can be reluctant to cede control in such a way.
But there are other forms of investment that growing businesses can seek which provide an alternative to the established methods. Here is our guide to some of the most popular:
Peer-to-peer (P2P) lending is growing in popularity in Ireland as a method of funding. P2P lending is where the public can invest a sum – anything from €50 upwards – with a P2P lending company, which then lends amounts to businesses seeking finance. The business then pays that amount back, plus interest, in monthly tranches for an agreed time – usually from six to 60 months.
For growing businesses, while P2P lending is similar to taking out a loan, it has advantages in that the application process is much swifter – often involving an online application form, which is approved (or not) within 24 hours. There is also a lot less paperwork to deal with in a P2P lending scenario compared to a traditional bank loan.
Businesses can borrow anything from a few thousand euros to hundreds of thousands through P2P lending.
P2P lending is also popular among investors. Often, investors can put in relatively small sums; sometimes they may just want to put back into their community or put their money to use rather than leaving it in a bank account. This solution offers healthy returns in the form of monthly interest payments – often between 5% and 20% – which can then be taken out or reinvested.
While crowdfunding in its current form is relatively new – having developed quickly in the past 20 years, along with the widespread adoption of the internet – its principles are hundreds of years old.
Businesses seeking funds for growth or to develop a new product or technology can post online about it. They tell potential investors what they want to achieve with the funds on one of the many crowdfunding sites based in Ireland – a quick Google search will show the popular ones – along with how much they want to raise. Anyone can pledge an amount, large or small, towards that goal.
Crowdfunding is rather like traditional cooperative movements, where communities or groups pooled their resources towards a common goal such as purchasing equipment.
A criticism of crowdfunding is that it was unregulated, but that was rectified last January when the Central Bank of Ireland announced a new regulatory regime for Crowdfunding Service Providers under EU Regulation.
A number of provisions of the Consumer Protection Code 2012 now apply to advertising by crowdfunding service providers in Ireland. Among other requirements, any advertisement must be fair and clear, and must not mislead or seek to influence consumers unduly in their investment decisions.
Crowdfunding service providers must display a prominent warning message on all advertisements that investment in crowdfunding projects entails risks. This includes the risk of partial or entire loss of the money invested and that any investment is not covered by a deposit guarantee scheme or by an investor compensation scheme.
Advantages for investors include that they can get exclusive access to test a new product or preference to buying it when it comes to market.
Another source of funding can be from angel investors. These are usually wealthy individuals – often successful businesspeople themselves – or groups that invest money into start-ups or early-stage businesses in return for involvement in the management of the business and/or a percentage of the company’s future profits, which is called an equity stake.
Angel investors can bring benefits above and beyond their money, such as experience running businesses and industry contacts that can help boost a business faster than the management could have done on their own.
Asset financing will be familiar to many people who have purchased assets as part of their personal finance plans and paid for them over a specified number of months. Asset finance works in a similar way and is often used to buy large pieces of equipment – such as machinery or commercial vehicles.
A lender, such as a bank, provides the funds up front to buy the asset then the business repays the money owed over an agreed time. Once that period is up, the business owns the asset. The asset is used as security by the lender. Some lenders may require a deposit up front, which will be a percentage (e.g. 10%) of the net cost of the asset, but sometimes alternative arrangements can be made.
For growing businesses, getting paid is the aim of the game. But as any business owner – or member of the accounts team – knows, getting those invoices paid in a timely manner can be difficult. Nevertheless, there is a way to free up the funds that are sitting in unpaid invoices through invoice financing.
Invoice financing can help businesses to manage their cash flow more effectively, but it is also often used to help businesses to grow, through investment in people or equipment or acquisition. In essence, you submit your outstanding invoices to an invoice finance provider. They then send you the bulk – usually 90% – of the value of those invoices within the next day. The invoice finance provider then chases up the invoices on your behalf and sends you the remainder of the outstanding invoices when they are paid, minus their fee.
When SMEs want to grow, sometimes that growth cannot be funded through profits alone – certainly to achieve the ambitions of the directors at the pace they want to develop. In these cases, outside funding is needed to put the resources in place.
Still one of the most common forms of outside funding for growth is a bank loan. These have been around for centuries and are largely trusted, but bank loans need to be paid back, with interest. Sometimes, understandably, entrepreneurs don’t want to go down that route, especially as interest rates are currently rising.
Other forms of investment involve outside interests such as venture capitalists, taking a stake in a business in return for investing a set sum. Again, while this is popular, it does mean the outside investor can have a say in the running of the business and will look to make an exit, and a return on their investment, in a set timescale. Often, entrepreneurs can be reluctant to cede control in such a way.
But there are other forms of investment that growing businesses can seek which provide an alternative to the established methods. Here is our guide to some of the most popular:
Peer-to-peer lending
Peer-to-peer (P2P) lending is growing in popularity in Ireland as a method of funding. P2P lending is where the public can invest a sum – anything from €50 upwards – with a P2P lending company, which then lends amounts to businesses seeking finance. The business then pays that amount back, plus interest, in monthly tranches for an agreed time – usually from six to 60 months.
For growing businesses, while P2P lending is similar to taking out a loan, it has advantages in that the application process is much swifter – often involving an online application form, which is approved (or not) within 24 hours. There is also a lot less paperwork to deal with in a P2P lending scenario compared to a traditional bank loan.
Businesses can borrow anything from a few thousand euros to hundreds of thousands through P2P lending.
P2P lending is also popular among investors. Often, investors can put in relatively small sums; sometimes they may just want to put back into their community or put their money to use rather than leaving it in a bank account. This solution offers healthy returns in the form of monthly interest payments – often between 5% and 20% – which can then be taken out or reinvested.
Crowdfunding
While crowdfunding in its current form is relatively new – having developed quickly in the past 20 years, along with the widespread adoption of the internet – its principles are hundreds of years old.
Businesses seeking funds for growth or to develop a new product or technology can post online about it. They tell potential investors what they want to achieve with the funds on one of the many crowdfunding sites based in Ireland – a quick Google search will show the popular ones – along with how much they want to raise. Anyone can pledge an amount, large or small, towards that goal.
Crowdfunding is rather like traditional cooperative movements, where communities or groups pooled their resources towards a common goal such as purchasing equipment.
A criticism of crowdfunding is that it was unregulated, but that was rectified last January when the Central Bank of Ireland announced a new regulatory regime for Crowdfunding Service Providers under EU Regulation.
A number of provisions of the Consumer Protection Code 2012 now apply to advertising by crowdfunding service providers in Ireland. Among other requirements, any advertisement must be fair and clear, and must not mislead or seek to influence consumers unduly in their investment decisions.
Crowdfunding service providers must display a prominent warning message on all advertisements that investment in crowdfunding projects entails risks. This includes the risk of partial or entire loss of the money invested and that any investment is not covered by a deposit guarantee scheme or by an investor compensation scheme.
Advantages for investors include that they can get exclusive access to test a new product or preference to buying it when it comes to market.
Angel investors
Another source of funding can be from angel investors. These are usually wealthy individuals – often successful businesspeople themselves – or groups that invest money into start-ups or early-stage businesses in return for involvement in the management of the business and/or a percentage of the company’s future profits, which is called an equity stake.
Angel investors can bring benefits above and beyond their money, such as experience running businesses and industry contacts that can help boost a business faster than the management could have done on their own.
Asset financing
Asset financing will be familiar to many people who have purchased assets as part of their personal finance plans and paid for them over a specified number of months. Asset finance works in a similar way and is often used to buy large pieces of equipment – such as machinery or commercial vehicles.
A lender, such as a bank, provides the funds up front to buy the asset then the business repays the money owed over an agreed time. Once that period is up, the business owns the asset. The asset is used as security by the lender. Some lenders may require a deposit up front, which will be a percentage (e.g. 10%) of the net cost of the asset, but sometimes alternative arrangements can be made.
Invoice financing
For growing businesses, getting paid is the aim of the game. But as any business owner – or member of the accounts team – knows, getting those invoices paid in a timely manner can be difficult. Nevertheless, there is a way to free up the funds that are sitting in unpaid invoices through invoice financing.
Invoice financing can help businesses to manage their cash flow more effectively, but it is also often used to help businesses to grow, through investment in people or equipment or acquisition. In essence, you submit your outstanding invoices to an invoice finance provider. They then send you the bulk – usually 90% – of the value of those invoices within the next day. The invoice finance provider then chases up the invoices on your behalf and sends you the remainder of the outstanding invoices when they are paid, minus their fee.
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