Every startup typically needs financial backing to get off the ground. But given the current economic climate, it’s harder than ever to secure funding by traditional means. High street banks are becoming increasingly cautious about who they lend their money to in light of the ongoing uncertain global financial situation.
That’s where alternative finance comes in. Having grown exponentially over the last decade, it provides a means for small and medium-sized enterprises (SMEs) to access the vital funds needed to grow their businesses, when they need them most.
Delivered by non-traditional providers, alternative finance has many benefits to it. Primarily, it’s often faster to secure funding than with traditional bank loans. The funding options available are also more flexible, which makes it easier to manage cash flow and there’s less red tape concerned.
But the real beauty of alternative finance is there are so many different types to choose from. You’ve probably heard of a few, such as crowd-funding peer-to-peer lending. But do you know what each one does?
Here are the main kinds of alternative finance that you need to know about and their key features.
Invoice finance
Unpaid invoices are a big problem, particularly for small businesses. So why not turn them to your advantage through invoice finance, which enables you to gain access to cash from unpaid invoices? Rather than waiting for payment, which can sometimes take a long time, you can unlock that revenue almost immediately.
It works by a lender buying a business’s unpaid invoices in order to release the cash. The cost of the invoice is then paid back to the lender at a set rate over an agreed period, or the customer pays their invoice bill directly to the lender at the end of the payment term.
Invoice finance is available in two forms: invoice factoring and invoice discounting. The former allows the factoring company to take over responsibility for payments and manage general credit control, meaning the customer pays the lender directly. The latter enables a firm to manage payment collection and follow-up on it themselves, in addition to being in charge of the sales ledger.
Unsecured business loans
Sometimes known as term loans or cash flow loans, unsecured business loans allow a company with no assets or which doesn’t want to use them as security against a loan to access funds quickly without putting their assets at risk.
The principle is that a business and lender will agree the cash amount, timeframe and interest rate at which it has to be repaid. Repaid in fixed monthly instalments over three months to three years, borrowing amounts normally range from £25,000 to £250,000.
Asset finance
Simply put, asset finance is a hire agreement that allows an asset to be bought and paid for, for an agreed sum over time. In this case, an organisation can use its assets as collateral to ensure that missed or late payments are less likely to put them into debt.
Hire purchase, asset refinancing, equipment lease, operating lease and finance lease are the main types. Each enables a business to lease or buy the machinery, equipment or technology required to operate and grow. They also help to avoid unmanageable interest rates and improve cash flow.
Property finance
Property finance is a business loan which is secured using a residential or commercial property as collateral against the loan. More flexible than a traditional loan, it allows companies with little or no assets to be accepted for a loan.
Crowdfunding and peer-to-peer lending
Crowdfunding involves money being raised by a large group of people to fund a business or project. Companies can use it to raise capital in exchange for giving their backers shares or a reward, such as their own merchandise.
Peer-to-peer funding is similar, with a group of investors raising funds for a business. But it differs in that investors receive interest on their investment in return for providing the company with the finance it needs.
Which alternative finance is right for you?
Some types of alternative finance are better in certain situations than others, depending on your specific needs. That’s why you need to make sure you choose the right one.
You need to look at a host of different factors, including how much you want to borrow, how quickly you need it and what terms you are willing to meet as regards repayment amount, interest rate and timeframe. Don’t leave it to chance - seek advice from an independent alternative finance expert on the best option that’s going to work for you.
Alternative finance is a lifeline for many SMEs. But you also need to be realistic about what you can afford to borrow and be able to keep up with your financial obligations.
