When you run a business, there can be times when you need a little financial help. This can be especially true for smaller businesses who may not have large capital reserves to fall back on. You could need an extra injection of cash for any number of reasons, from renting new offices to buying new stock or machinery. It may even be a simple boost to your cash flow in order to keep the business going. In times gone by, the usual solution to this problem was to visit your local bank and secure the finance from them. However, since the 2008 recession , this has become more and more difficult. So what can your business do if it needs a way to access a business loan? For many, alternative finance is the path they are choosing to take.
- What is alternative finance?
- Funding your business with alternative finance
- Why does the UK need alternative finance?
- Examples of alternative forms of finance
- Peer to peer lending
- Angel investing
- Invoice finance
- Merchant cash advance
- The alternative finance market
- Alternative finance is a superb option
What is alternative finance?
In simple terms, alternative finance is any kind of finance you arrange from non-traditional sources. As noted above, high-street banks have always been the default choice previously. Alternative finance is accessing credit through other sources.
Funding your business with alternative finance
To fund your business, you first need to decide which kind of alternative business finance you will use. You then need to find the right platform online or seek out private investors if needs be. For many forms of alternative investment, you will need to fill in an application form online. Once you have been accepted, you can then access the money. For private investment, you may have to prepare a business pitch to deliver in person.
Why does the UK need alternative finance?
Much of why this sort of finance is needed goes back to the 2008 recession. Banks have tightened up on giving loans to SMEs which has made it harder for some to access them. The fact is that traditional lenders like banks now have a strict, set criteria when it comes to lending money.
They will simply refuse your application if your business does not meet their criteria for any reason. This is exacerbated by computer packages making many decisions with no room for human intervention. This meant that alternative finance became necessary for businesses looking for alternative business finance.
As well as being easier to access, this new alternative financing for small business is also much quicker. You can often apply for alternative finance and get a decision within hours. This is much faster when compared to the timescales involved with more traditional sources. For businesses who need cash quickly to cover sudden emergencies, they are very handy.
Many UK organisations like to use alternative finance as it offers a more flexible way to raise money. Not only are there many types of finance to choose from but you also have more control over the terms involved. With attractive interest rates too, it’s easy to see why this type of funding is needed in today’s UK business sector.
Examples of alternative forms of finance
As noted above, there are many alternative ways to access the funds needed to continue trading. Below are some of the most common:
Peer to peer lending
This works like a standard bank loan but you access it through online platforms like Zopa. Just like a conventional loan, you would borrow money from investors and agree to pay it back over a period of time with a set rate of interest.
Many people confuse this with P2P Lending but it’s quite different. Rather than simply loaning money to pay back, this involves you giving away a small percentage of equity in your company to investors. Crowdfunding is also usually done via simple to operate online platforms, like KickStarter and IndieGogo
This involves private investment in return for equity in your business. The benefit of this compared to normal private investment is that you may also get business advice from your angel investor.
The lender agrees to buy part of your unpaid invoices. This means you get the money owed right away. When the invoice is finally settled, you get what is left over but with a lending fee deducted.
Merchant cash advance
This innovative funding option makes use of the card terminals you have in store. Once the money is lent, repayments are taken from a percentage of your card payment revenue. Lenders will usually look at past few months’ card transaction data to decide how much money to lend and on what terms.
The alternative finance market
There’s no doubt that the alternative finance market is thriving. To date, £8.7 billion has been lent to an estimated 40,000 UK companies. With 47% of SMEs still classed as ‘permanent non-borrowers’, it is starting to help more and more escape this trap. It’s reported that the UK is home to 5.7 million SMEs, which make up most of the private sector, this sort of finance is key to helping the whole country prosper.
Alternative finance is a superb option
While lending through traditional routes is still viable, the rise of alternative business finance shows there can be better options for some small businesses . If your business has been refused a bank loan, or you fancy a more holistic approach to lending, then alternative finance is worth thinking about. With so many options to consider and so many other UK companies accessing this faster type of business finance , there has never been a better time.
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