Get a business up and running for peanuts

Pippa Murray lives in a 4×3 metre wooden shed in Battersea, southwest London, for peanuts. She is one of a growing number of cash-strapped entrepreneurs and is in the process of launching her own business, in this case Pip & Nut, which makes natural nut butters with flavours such as peanut, coconut and almond. Like most aspiring small business owners, Ms Murray, 26, faced a dilemma — how could she afford to give up her job at the Science Museum to develop her idea?

She entered a competition run by Escape the City, a company that matches people who are fed up with their job to non-corporate opportunities. The prize was to sleep in the shed without having to pay rent, and work at Escape the City’s headquarters. There were more than 3,000 entries, which suggests that there are a lot of people in her position, harbouring entrepreneurial aspirations but in need of funding.

“With lots of people being made redundant or feeling unhappy at work, and young people coming out of university feeling frustrated by not being able to get the job they want, there is a greater number of people thinking about creating their own start-up,” Ms Murray says.

“I approached people interested in my idea to see if they would invest at an early stage in exchange for services. I pitched to a branding agency who was willing to take a risk, as well as friends and family. I also entered competitions — there are lots of companies who offer support to young businesses, free desk space to start-ups, for example.”

Since the start of the financial crisis, the number of limited start-ups has risen from just over 300,000 in 2008 to more than 500,000 last year, according to Creditsafe, which provides company credit reports. Meanwhile, the number of small businesses being approved for bank loans has fallen. The Bank of England says that the growth rate for stock lending to SMEs has been negative for the past four years.

George Osborne has announced new rules requiring UK banks to refer failed SME loan applications to other lenders (see right). Have you got a great business idea but are not sure where to find funding? Here’s where to look.

Crowdfunding

Many businesses are unaware of the breadth of lenders, says Adam Tyler, chief executive of the National Association of Commercial Brokers. “We hear of many small businesses that feel bitterly disappointed when they get turned down for finance by banks. After working hard to pull together a lengthy application some creditworthy businesses are slipping through the net.”

The website findSMEfinance.co.uk offers access to more than 100 lenders — from high street and challenger banks to peer-to-peer specialists — via an independent broker. This includes crowdfunding sites, which enable businesses to pitch to communities of backers. Investors range from “armchair dragons” offering a few pounds to professionals investing thousands.

Most crowdfunding sites ask start-ups to offer staggered rewards, such as exclusive access to a product, a discount on services or a proportion of equity in the business. They work best for those who have an interesting story, inspiring site visitors to invest. Goncalo de Vasconcelos, the founder of the equity crowdfunding platform SyndicateRoom, says: “Beyond the cash injection it offers are a number of benefits. First and foremost is the network of advocates you gain. The people who invest in your company want to see you succeed, and many will open doors to help you achieve that success.

“But equity crowdfunding also means accepting the input and scrutiny of your investors, and the expectation that you will ultimately need to find a way to exit so that they can see a return on their investment.”

The most popular equity crowdfunding sites are Crowdcube.com and Seedrs.com, with the average investment by an individual on Crowdcube standing at £2,500 according to the website startups.co.uk. Non-equity fundraising sites include Indiegogo.com and Kickstarter.com.

The majority of sites won’t charge for you to post a pitch, but typically charge 5 per cent if you meet your target.

High-street lenders

Banks are still lending, but you need to do your homework to convince them you are worth it. “The easier you make it for the bank, the smoother the process will be,” says Stephen Johnson, the managing director of commercial mortgages at Shawbrook Bank.

Sue Hayes, head of SME banking at Barclays, adds: “Your business strategy will need to be viable, with the lender being able to see a clear line to profit. We run free Let’s Talk Business Ideas seminars which can help determine whether your new business is likely to be profitable and provides an opportunity to network with other business owners.”

Borrow against your possessions

Karen Hallam, 33, gave up her job in the City to launch Memory Boutique, which transforms children’s clothes into keepsakes. She raised £5,000 by using a vintage Chanel handbag and Rolex watch as collateral, redeemed after three months. She approached borro.com — a company which offers immediate loans to individuals and small businesses against luxury goods.

Swap a stake for help

On average, 41 hours of free administrative support and 36 hours of free IT support is offered by friends and family in the first year of a business starting up, according to research by AXA Business Insurance. You may also be able to persuade companies to offer help in return for an equity stake. Pippa Murray approached a design company to ask if it would create her brand image and packaging in return for a stake in her business, and it was happy to become involved.

Find a desk space

Start-up incubator companies such as Wayra (uk.wayra.org) and TrueStart (truestart.co.uk) offer small pots of money to help grow businesses, in exchange for a percentage of equity, with office space as part of the deal. For young entrepreneurs, aged between 16 and 25 the site somewhereto.com lists free spaces from desks to meeting rooms and exhibition halls, across the UK. For those based in London, GoCoWo.com shows a map of the city with spaces housing start-ups, listing prices and facilities. Neardesk.co.uk lets you rent desk space in locations across the UK from £2.50 to £10 an hour.

Fresh hope if you are setting up a small company

High-street banks that reject loan applications from small companies will be forced to refer them to alternative lenders under a radical shake-up announced by George Osborne this week (Robin Ash writes). Small and medium-sized enterprises (SMEs) who are declined credit will be asked if they want their details to be shared with online platforms who can refer them to challenger banks, crowdfunding sites and peer-to-peer lenders.

The Treasury has identified a “market failure” caused by a lack of competition in business lending, with Bank of England data revealing that loans to SMEs by high-street banks fell by £723 million in the first quarter of this year. Last month the Competition and Markets Authority recommended an inquiry into business services offered by high street banks. It found that the biggest four — Lloyds Banking Group, the Royal Bank of Scotland, HSBC and Barclays — control 85 per cent of current accounts and 90 per cent of loans. Most SMEs approach only their main bank for finance and 40 per cent give up their search if they are unsuccessful. In many cases they would be welcomed as customers by alternative lenders, who have a greater appetite for risk, but SMEs and finance providers are often unaware of one another’s existence.

The new rules on lending are part of the Small Business, Enterprise and Employment Bill and will be backed by a £100 million extension of the government-backed British Business Bank’s investment programme, which gives businesses access to alternative finance.