Guest post by Simon Curteon
Gone are the days of having to go to your high street bank for business finance, only to be confronted with hurdles, roadblocks and piles of paperwork.
Nowadays, alternative business finance lenders and innovative finance options are making it easier for SMEs to access the funding they need to compete and grow.
The good news is, alternance finance is quick and easy to apply for. Even businesses with a less-than-perfect credit history may also be eligible, because alternative lenders tend to take a more holistic approach when it comes to lending.
What is alternative finance?
Alternative finance is an umbrella term: it covers finance types that aren’t associated with traditional lenders. Instead of taking a one-size-fits all approach, alternative finance is more flexible and each solution is designed with a specific need in mind.
For example, merchant cash advances are geared towards retail businesses who take customer card payments and require a cash flow boost.
Businesses that rely on assets such as machinery, vehicles or technology – but can’t afford to buy them outright or want to leverage the benefits of equipment leasing – may want to explore the different types of asset finance available.
Alternative finance types
While mainstream finance can work well for some businesses, strict criteria means that many small businesses are ruled out. For instance, traditional business loans often require you to secure the loan using valuable assets your business owns.
The fact is, many startups and SMEs simply don’t own valuable assets. While some alternative finance types do require security, many don’t. So without further ado, let’s take a look at the various alternative finance options out there today.
1. Coronavirus Business Interruption Loan Scheme
Lots of alternative lenders, as well as mainstream banks, are accredited Coronavirus Business Interruption Loan Scheme (CBILS) lenders. CBILS loans come in the form of term loans, overdrafts, invoice finance and asset finance.
The deadline to apply is 31 March 2021, so if you’re experiencing cash flow problems or disruption to trade due to the coronavirus pandemic, there’s still time. You could be eligible for up to £5 million, depending on your circumstances.
If you’ve already received finance due to coronavirus disruption, you might be eligible for a second CBILS loan. The UK Government makes a Business Interruption Payment to cover the first 12 months of interest payments, so you won’t pay interest for the first 12 months.
2. Unsecured business loan
Designed for businesses that can’t or don’t want to offer security.
Unlike secured business loans, you won’t be required to provide any of your business assets as security when you take out an unsecured loan.
Depending on the lender, you may have to put forward a personal guarantee, but this isn’t always the case. The lender will look closely at your business’ trading position when making a decision, as well as its credit history.
It’s important to bear in mind that because unsecured lending is riskier to the lender, the interest rates can be higher. How much you pay will depend to some extent on your credit rating and the quality of your end of year accounts.
3. Merchant Cash Advance
Designed for businesses that take debit/credit card payments.
The merchant cash advance is a relatively new form of business finance, and an innovative one at that. It works by you borrowing a lump sum and paying it back incrementally through your customers’ card payments.
It’s a dynamic form of business finance in that it adapts to how much your business makes, making it easier to manage payments. To be eligible for a merchant cash advance you’ll usually need a consistent customer payment history.
If you’re a sole trader, the lender will look at your personal credit report.
4. Invoice Finance
Designed for businesses that invoice customers/clients.
You know how we spoke about some forms of alternative finance being secured?
Invoice finance is one such example. It’s technically ‘secured’ lending because it’s related to the value of the invoices your business has raised. The concept is simple: the lender advances you an agreed percentage of the value of your invoices immediately.
The final amount (minus the lender’s fee) is credited to you when the customer finally pays the invoice. If you opt for factoring, the invoice finance provider may also provide credit control services and chase late payments on your behalf.
Because you get paid for work faster, invoice finance can help you overcome cash flow issues quickly.
5. Asset Finance
Designed for businesses that want to spread the cost of an asset.
If you require a piece of tech or machinery in order to grow your business, but lack the funds to be able to buy it outright, all is not lost. Broadly speaking, asset finance allows you to spread the cost of an asset over time. It falls into three main categories:
As long as the lender has an appetite for your plans, you have an exit plan and meet the eligibility criteria, you’re in with a chance
Hire purchase: a quick and easy way to acquire an asset and pay for it in instalments over a set term (you have the option to purchase the asset outright at the end).
Equipment leasing: a way to rent the equipment you need – you can return the asset when the lease expires, pay the remaining amount to buy it outright or upgrade it.
Asset refinancing: a type of asset finance that allows you to release capital tied up in the value of the assets your business owns.
6. Business credit card
Designed for businesses that want easy access to a line of credit.
As with a personal credit card, a business credit card provides your company with access to a revolving line of credit based on your needs and circumstances. It can be used to help you manage cash flow and separate your business and personal spending.
Some business credit cards incur an annual fee and as with personal credit cards, you’ll have to pay interest on your balance if you don’t repay what you owe in full each month.
Depending on which card you opt for, you can also benefit from cashback, rewards and other perks such as free travel insurance and 0% interest on purchases for a set time.
7. Bridging finance
Designed for property investors and businesses that need to ‘bridge a gap’ in finance.
Bridging finance allows landlords and property developers to purchase a property before selling their existing asset. It can also be used by companies to buy homes at auction and to fund ground-up or light renovations to properties.
It’s not just utilised by the property industry though.
As long as the lender has an appetite for your plans, you have an exit plan and meet the eligibility criteria, you’re in with a chance. For instance, a startup partaking in an equity financing round may use bridging finance to cover costs until the funding round closes.
Where can I apply for alternative business finance?
All business types have their positives and negatives, so it’s important that you read and understand the T&Cs – including fees and interest rates – before making a commitment.
With so many lenders and products on the market today, it can be difficult to know where to look, let alone what to choose. That’s where Funding Options comes in.
We’ve been chosen by the British Business Bank to help SMEs in the UK access the finance they need as quickly as possible. We’ll compare over 120 lenders to match you with the best options for your business.
We’re also partnered with over 40 CBILS-accredited lenders, so you can use us to apply for a CBILS loan. Use our free online business finance finder to get started. You can find that here
More about alternative finance here
Simon Cureton is Chief Executive Officer at Funding Options