Business loan or private capital raise: which is the best finance option for SMEs?  

Cash is critical to business growth, and companies need clear access to finance to support their development. Yet cash flow remains the number one reason small businesses fail, and only 4 in 10 SMEs apply for external funding – why?   One major challenge is the number of finance options available to start-up and scale-up businessesCompany leaders don’t want to ‘back the wrong horse’ and get trapped in an inappropriate financial agreement, when there are more flexible funding opportunities available.  

To help SMEs choose the most appropriate funding route, WeOwn looks at two popular options available through our business finance platformpeer-to-peer loans and private capital raises.  

Debt financing: why do SMEs take out a business loan 

There are three main reasons that SMEs find business loans a more attractive prospect than private capital raises. These are:  

Retaining equity – lenders make money on the interest payments from loan agreements, so there’s no need to give away business capital in order to secure finance.  

Quick cash boost – the online loan application process is very quick, providing rapid access to finance. The amount borrowed can also be repaid relatively quickly, making business loans a good short-term funding option.  

Low borrowing threshold  because of the straightforward process and short-term agreement, it’s often cheaper to borrow small amounts of money than run an investment round. Businesses loans on the WeOwn platform start at 20,000.  

What are the benefits of peer-to-peer loans over mainstream bank loans?  

Unlike banks, which loan money from their own resources, WeOwn doesn’t fund business lending. Instead, we provide the platform for SMEs to connect with investors, peer-to-peer. The benefits of this approach are:  

Better success rates – private investors review applications and choose who they want to back, rather than judging every business against set criteria. What big banks see as high risk, private lenders might view as an opportunity, meaning application rates tend to be higher with peer-to-peer loans. 

Quick and simple application process – complex printed paperwork does not feature in the WeOwn lending model. Everything is done online; SMEs can check eligibility in minutes, matching with lenders and receive funds within seven working days. 

Unsecured – unlike traditional bank loans, which require debt agreements to be secured against a physical asset, all business loans arranged through the WeOwn platform are unsecured.  

Flexible rates and lower fees – investors don’t just choose who they want to lend to; they set their own terms as well. Multiple lenders can propose agreements to SMEs, and this competition encourages lower interest rates and better repayment terms than mainstream bank lending.   The WeOwn platform also keeps costs down by running a lean digital structure, with no intermediaries or middlemen to repay. Plus, we offer no penalties for early repayment.  

Equity financing: why do SMEs choose a private capital raise?   

While many SMEs find business loans the simplest way to raise capital, others choose to go down the equity fundraising route – for a number of reasons: 

Access to larger amounts of cash – WeOwn peer-to-peer loans are available from 20,000 – 1m, but there are SMEs that will want to borrow more than this. Private capital raises have no upper limit, so companies can apply for the exact amount they need.   Larger fundraising opportunities are ideal for scale-up businesses who can no longer rely on microloans to accelerate their growth.   

No set monthly repayments – investors like SME equity offers because they see the long-term value in backing that business, not because they are guaranteed monthly income. This enables companies to focus on growth, rather than meeting a fixed repayment schedule.  

Investors assume the risk – with peer-to-peer loans, SMEs must pay back lenders even if their business isn’t faring as well as they hoped. However, ia company fails after launching an equity raise, the business owner is not obliged to pay back investors.  

Relationships for life – investors have a vested interest in helping SMEs to succeed when they take a stake in that business. This encourages close, long-term relationshipsthe more successful companies become, the more likely investors are to put further funding into that business.  

What are the benefits of an online capital raise over private equity or venture capital funding?  

The two most obvious alternatives to a private capital raise are private equity groups and venture capital. However, both require SMEs to jump through hoops to show a compelling investment case, which is very time consuming.   Other reasons that scale-up businesses choose private capital raises over private equity and VCs include:  

Greater control – venture capital in particular can be quite restrictive, as investors get involved in management decisions, whereas the WeOwn platform allows SMEs to retain complete autonomy over how their company is run.   

Up-front funding – with VC and private equity backing, the release of funds can sometimes be slow, as investors demand certain terms are met before adding money to the pot. WeOwn’s model releases all available funds to SMEs as soon as the online raise has reached its target.  

New, fresh investors – WeOwn’s online investment process is based on SMEs offering investors digital shares or tokens in their business. Because these are not physical assets, it’s easy to offer fractional shares at a smaller price – attracting a different type of investor who doesn’t have the desire or funds to play the private equity game. 

Easier to share success – rather than placing the reporting burden on busy companies, WeOwn’s digital platform enables investors to log onto their own personal dashboard at any time, to view the progress of their stake. We have also developed a number of digital tools to make communications easier; for example, SMEs can issue online updates or run investor polls in real-time, rather than needing to get people in the same room for a traditional AGM.   Additionally, WeOwn has developed a secondary trading market so that investors can buy or sell their equity at any time  which takes the pressure of SMEs to hit financial or growth targets.  

Business loan or private capital raise: which is the best?   

The insight we’ve shares shows some compelling reasons why some SMEs choose business loans to generate cash, while others prefer to raise capital online. However, the decision is ultimately down to each individual business.  

The number one question that start-up and scale-up business owners should ask before committing to any type of finance is: why are we doing this? Setting clear objectives will enable them to determine how much they need to borrow, over what time period, to meet those goals – and ultimately shape which finance route is the most affordable, appropriate option.  

Join the WeOwn business platform for free to learn more about alternative business finance, and to launch your application.  
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