In simple terms, it 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 sources other than this.
To fund your business in this way, you first need to think which kind of alternative finance you will use. When this is done, you need to take steps 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 will then be able to access the money. For private investment, you may have to prepare a business pitch to deliver in person.
Much of why this sort of finance is needed goes back to the UK credit crunch around 2008. Since this happened, banks have tightened up on giving loans to SME’s which has made it impossible 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 them for any reason. This is exacerbated by computer packages making many decisions with no room for human intervention by bank employees. This meant that alternative finance became needed to give companies a way of getting the cash they required.
As well as being easier to access, this new way of gaining finance 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 also like to use alternative finance as it offers a more flexible way to lend 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 also, it is easy to see why this type of funding is needed in the modern UK business sector.
As noted above, there are many alternate ways to access the funds needed to continue trading. Below are some of the most common:
this works like a standard bank loan but you access it through online platforms like Zopa. As with a normal loan, you would lend 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 is different. Rather than simply loaning money to pay back, this sees you give away a small percentage of equity in your company to investors. Crowdfunding is also usually done via simple to operate online platforms.
-if you watch ‘Dragon’s Den’ then you will know about this type of alternate funding. This sees private investment sought by smaller start-up’s in return for equity in their 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.
this innovative funding option makes use of the card terminals you have in store. Once the money is lent, repayments are taken as a proportion of the card revenue you subsequently make. Lenders will usually look at past months card transaction data to decide how much money to lend and on what terms.
There is no doubt that the alternative finance market is in great health currently. To date, it has lent around £8.7 billion to an estimated 40,000 UK companies. With 47% of SME’s still being classed as ‘permanent non-borrowers’, it is starting to help more and more escape this trap. With it being reported that the UK is home to 5.7 million SME’s which make up most of the business sector, this sort of finance is key to helping the whole country prosper.
While lending via traditional routes is still viable, the rise of alternative funding shows that it is not the best fit for all. If your business has been refused a bank loan or you fancy a more holistic approach to lending money, then alternate ways of going about it are worth thinking about. With so many options to consider and so many other UK companies taking advantage of what it offers, there has never been a better time to test the water.
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