It’s no secret that access to mainstream credit and lending facilities has dried up significantly since the onset of the Financial Crisis in 2007. Almost overnight, risk-averse banks started taking a one-size-fits-all approach that simply doesn’t work for many small businesses, especially when their situation is urgent, complex, or challenging. Even worse, many small businesses simply give up if mainstream lenders reject their application for finance. And this is where the broad category of ‘alternative finance’ comes in.
An accessible alternative?
The accessibility of alternative finance depends on the individual circumstances of the business: like banks, lenders require specific details to ensure the SME is suitable. However, there’s such an array of alternative lenders – with more and more providers cropping up all the time – that it’s easier than ever to find the perfect fit for your business, whatever position or industry you’re in. Here are three examples of alternative finance that demonstrate the variety of options available:
1. Merchant cash advance
If your customers pay you via card terminals, you’re already eligible to apply. Lenders will advance you a cash sum based on card sales, generally up to a month’s revenue, allowing you to pay it back as a percentage of future turnover or a pre-agreed fixed sum. It’s quick, straightforward, and often a good fit for retailers with a high number of low-value transactions.
2. Individual invoice finance
Invoice finance is another example of an innovative finance solution for SMEs, and it’s a great way to raise cash if you have large outstanding invoices, big projects, or established clients. By showing invoices to your lender, they can immediately raise most of the invoice’s value, to be paid back on receipt of payment from your client. Because the lender is effectively placing trust in your customer to pay the invoice, it helps to have creditworthy blue chip clients – and if the arrangement is agreed, it can be a great way to avoid cashflow pitfalls.
Also known as peer-to-peer (P2P), online platforms connect businesses seeking finance with a number of individual investors. Generally this involves either investors taking a small percentage of equity in the company, or lenders loaning money and earning interest on repayments – but either way, it can be a mutually beneficial agreement that is much simpler and easier to secure than the traditional route via your bank.
It’s clear that the alternative finance market for small businesses is more diverse than ever – but this also means it’s even more important to understand your own needs and match them to the product and lender that fits best. Overall, the availability of finance depends on individual circumstances, both of lender and borrower, and platforms like Funding Options are available to help you find the best product quickly. Finally, a new law passed by the UK government will require banks to refer businesses they reject for finance to alternative lenders - leaving small businesses looking to grow in a much, much better position.
Conrad Ford, founder and CEO, Funding Options
Funding Options is an industry-leading online platform that scans the market to connect small businesses with alternative lenders. Through a combination of leading technology and highly rated customer service, we have already helped hundreds of businesses raise hundreds of millions of pounds of finance. And as a startup ourselves, we understand the challenges that small businesses face – so our service is fast, no-obligation and completely free.
For more information visit FundingOptions.com
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