In today’s world of finance, there are many forms of traditional finance and capital investment available to companies who are looking to fund expansion through corporate finance or alternative business funding. Such sources include bank loans and credit lines, private equity, hedge fund investment, IPO’s, (initial public offerings), venture capital, and bond issues.
However, for start-ups, small, and medium-sized companies, the above funding sources are more often than not unavailable to them. This will be because these companies do not fall within the compliance and investment criteria of these lenders or investors. These companies are left with no alternative but to seek alternative sources of funding and finance.
What happens if a company is unable to raise capital investment from either traditional sources of financing or from alternative financing as outlined above? There is one more avenue to be explored for companies to raise finance where this market is growing exponentially every year.
The Demand Bank Guarantee is growing in popularity as each year goes by, as a unique alternative to raising a loan or lines of credit. Yes, a Demand Bank Guarantee can be monetised if it contains the correct verbiage. This form of finance has been around for many years and there are a few specialist companies that are recognised experts in the Demand Bank Guarantee market.
Briefly, a Demand Bank Guarantee is governed by ICC Uniform Rules for Demand Bank Guarantees, (URDG 758). There may be many companies who have not heard of or understand this statement so below is a brief explanation.
ICC is a synonym for The International Chamber of Commerce whose job is to set the rules for International Trade which includes Demand Bank Guarantees. All banks of note adhere to all the rules laid down by the ICC.
URDG 758 is a rule laid down by the ICC and stands for Uniform Rules for Demand Bank Guarantees. Basically, it states that all Demand Bank Guarantees must be used for a specific purpose as laid out in the verbiage contained therein.
If the verbiage states that any credit line or loan will be guaranteed by the Demand Bank Guarantee all lenders will look favorably on any loan application. It is also payable on first demand. This means that if the borrower defaults the lender can claim immediately against the Demand Bank Guarantee without fear of refusal from the issuing bank.
Peer to Peer Lending also referred to as P2P, are online lending platforms where lenders are matched with borrowers. P2P companies inevitably have much lower overheads than traditional lenders such as banks. Despite any due diligence charges and match-making fees, P2P companies can offer their services at a cheaper rate than banks.
The result is that the borrowers can borrow at cheaper rates and the lenders can get a better return than those offered by investment products and saving schemes. As with all lending, borrowers can still default of their financial obligations.
Equity Crowdfunding also referred to as investment crowdfunding or crowd-investing, are specialised companies that utilise online platforms to raise capital for either start-ups or very early-stage companies. Potential investors are offered a stake in the company, (shares), that is in proportion to their investment.
Instead of finding a small number of investors to invest large sums, Equity Crowdfunding targets a larger more broad-based group of investors. In this way, finance can be raised by a larger number of investors investing smaller amounts of capital.
Companies requiring corporate finance or alternative business funding can promote their company or projects to a much larger audience compared to that of traditional capital raising. In this way, shareholdings are diluted and companies are not beholden to the power of a few major investors.
The downside to Equity Crowding is that any shares received for capital investment will be extremely illiquid and difficult to sell at a moment’s notice. But as with any start-up, there is always a risk that the company may not make it to market or benefit from a trade sale.
Reward Crowdfunding is an interesting form of financing and is aimed at small businesses. The company will showcase its business on an online crowdfunding platform hoping to obtain donations, (not investment) in return for reward(s). Such companies may be solar-powered watches where the company will offer a watch in return for a specified donation.
This form of corporate finance or alternative business funding allows companies to get off the ground without the burden of having to pay back loans. It is also one of the cheapest ways of raising capital and the owner retains 100% of the equity. However, showcasing the business on a crowdfunding platform can risk exposure to competition, and if the required sum is not reached, all donations will have to be returned.
Basically, a retail bond is a debt obligation issued to investors for a certain period with an annual or biannual interest rate. These types of bonds target the private investor as they tend to be smaller in size than those bonds aimed at institutional investors. The returns on some retail bonds make them more attractive than the returns standard saving schemes or equity investments. However, there are much larger retail bonds that are issued targeting the institutional investor.
If for example, a company has a large customer base, they then have a built-in audience so there is no need for a large marketing campaign to sell their retail bond. An example of this is Hotel Chocolat who enjoys a customer base of 100,000 in their Chocolate Tasting Club. The company raised £4 million by marketing their retail bond to their membership, and the interest was paid in the form of a monthly box of chocolates.
There are many ways for companies to obtain funding, from traditional sources to alternative business funding. However, we are all aware that obtaining finance or capital investment is very far from being straightforward. Many companies are refused credit by banks and other traditional financiers, and in many cases, alternative financing as outlined above does not appeal or work.
The Demand Bank Guarantee is becoming a very popular avenue for raising capital, and companies who are suffering from lack of investment should take note, and investigate this form of finance at their earliest opportunity.