Alternative Business Finance: What Are the Options?
With traditional bank lending in decline, this guide outlines the alternative funding options for early-stage and fast-growth businesses
It’s no secret that access to business funding dried up dramatically after the financial crisis in 2007. Unfortunately, the issue has persisted ever since, and many firms still find it excruciatingly difficult to access loans the old-fashioned way, in particular early-stage and fast-growing businesses.
Now it seems that government focus has shifted from trying to force or incentivise banking giants to lend more money, to finding ways of obliging them to recommend alternative business finance. A shift in attitude made clear in the recent Queen’s Speech, which ushered in new legislation telling big banks that they will now have to point would-be borrowers in the direction of alternatives when they cannot access bank loans.
But what are the alternative sources of business finance?
Well, there are several, and they are growing fast in popularity. Broadly, they can be categorised as those that rely on the business using their existing assets to raise funds, those that use new information sources to lend more effectively based on cashflow, and those opening up new sources of capital such as ‘crowdfunding’. Key to the appeal of alternative finance providers is simply that they offer funding at a time when traditional sources are blocked for many firms.
Asset finance allows a company to use their physical assets such as machinery, printers or vehicles to access loans and provide the vital lifeline of cash. Different lenders offer differing terms, so it is important to get the right advice and to understand exactly what any such deal really entails. Although relatively low profile, traditional asset finance is currently a vastly bigger source of non-bank funding than more press-worthy new online alternatives.
Invoice finance, more commonly known as factoring and invoice discounting, is an important means of raising funds based on invoices owed by customers. In some cases, invoice finance can be accessed online through selling invoices to the highest bidder. Ultimately though, the key ingredient in the appeal of invoice finance is its immediacy and certainty, invaluable to businesses needing urgent or flexible funding, whether to resolve a crisis or to support rapid growth.
Cashflow Finance refers to a new breed of short-term lenders, often taking advantage of new electronic data sources such as credit card receipts or online sales through platforms such as eBay. The withdrawal of traditional bank overdrafts has led to a plethora of new lenders focussed on these fast business loans, each with a particular niche; the trick is knowing where to look.
Crowdfunding and peer-to-peer lending
Finally, Crowdfunding and Peer-to-Peer Lending are innovative new types of finance, based around groups of individuals lending or investing through online platforms, in exchange for rewards or equity (depending on the model). Although currently small, this sector has seen extraordinary growth in the last few years, with no sign of slowing any time soon.
Inevitably, if businesses can’t turn to banks for funding to stabilise or grow then they will look elsewhere, and this is undoubtedly happening on an increasingly large scale. The government’s new measures to oblige banks to inform their rejected customers of alternative financing options is a positive step, and one that will surely add further momentum to this positive trend.
Conrad Ford is the managing director of Funding Options, is a free Finance Finder service to match firms with the right alternative finance products and providers