Alternative business finance – What are your options?

Alternative finance

Exploring different finance options when you’re ready to invest in and grow your business can be a daunting task. Sure, it’s great that bank loans are no longer the only option, but finding the right funding for your business among all the various finance choices isn’t easy. Not without a fair amount of research, that is.

Wondering how to raise money for a business is a stage most entrepreneurs and established business owners go through at some point. That’s why we’ve put together this useful guide to help you get your head around the basics.

What is the best financing option for a business?

This all depends on your specific needs and situation. You can start by thinking about the following questions:

  • How much do I need to borrow
  • How much can I afford to repay each month?
  • What do I need the money for?
  • How exactly will I spend the money?
  • Do I need to borrow or can I generate the money myself?
  • Do I need to borrow a lump sum all at once?
  • Am I owed money?
  • Do I want to spend the cash on everyday short-term expenses?
  • Do I need the cash for a one-off investment?
  • Have I made a business plan?
  • Have I completed a cash flow forecast?
  • Where do I want to be in a year or five year’s time?
  • How much will I be taking out in salary?
  • Am I handling any existing debt?

Start by looking at each of these questions to make sure your funding requirements are clear in your mind before you start to consider the options available to you. This way, you will be able to quickly establish which might be suitable and which is definitely not in the running, creating a short-list. Look at our guide below to learn more about each type of finance.

What is alternative business finance?

Alternative business finance is business funding that comes from somewhere other than a mainstream source, such as a high street bank. The term could do with some updating, because online lenders, quick business loan providers and other ‘sources of alternative finance’ are quickly becoming the go-to option for many small businesses.

This is because banks are still sticklers for making sure all loan applicants tick each and every box before approving finance. Small businesses can rarely fulfill all the required lending criteria for high street bank loans and have been seeking alternative finance in droves for the past five years or so.

This opening up of the lending market for businesses has been a game-changer for a lot of business owners seeking to grow their companies and bring their ideas to life. Fresh alternative sources of funding have been appearing each year, providing new and exciting opportunities through flexible funding. Let’s take a look at some of these alternative business finance options to help you establish which one(s) might work for you.

Online business loan

This is a bit of a catch-all phrase, but ‘online business loan’ actually tends to be used to describe a direct business loan from a provider who offers their loans exclusively online. These ‘term loans’ are often similar to bank loans in terms of the value of the loans and their repayment periods, but they are only available through a web-based lender with no bricks and mortar premises on the UK high streets.

Although business owners were skeptical, or at least cautious, about borrowing in this way when they first appeared, most people now accept these lenders as part of the business finance landscape and have come to trust them. In fact, as stories of banks mistreating small business customers emerged, online lenders started to look like a more trustworthy and ethical option than the Big Four.

Quick application – fast loans

One of the main reasons business owners choose to borrow through an online business loan provider is the ease of application and access to quick cash. Banks are notorious for having drawn-out complicated application processes, but this is not the case when borrowing through an online lender.

Applications are quick and easy and you can often get a funding decision on the same day that you applied. The money will then be in your account that same day in some cases. So, for small business owners who need to access fast business funding, online lenders hold much greater appeal.

Quick look guide – online business loans
  • Work like a bank loan
  • Values and repayment terms vary but reflect those offered by banks
  • Application is done online or over the phone
  • Much quicker access to cash than through a bank loan
  • Eligibility criteria can be more favourable than bank
  • Interest rates can be cheaper than mainstream bank loans
  • Good for people open to working with relatively new lenders
  • Not so good for those still nervous about not using a bank

Invoice financing

If you find that your cash flow suffers as a result of unpaid invoices, invoice financing, or factoring as it’s sometimes called, could be the right option for you. Invoice financing involves ‘selling’ unpaid invoices to a specialist financier who will chase up the outstanding payment and keep the money owed.

You will receive the value of the invoices upfront minus a fee (which is often a percentage of the value of the invoices). There are obviously costs associated with this type of borrowing, as there is with any form of business finance, but you are able to access the money owed to you immediately, rather than having to wait for invoices to be paid or chase up debtors yourself.

Quick look guide – invoice financing
  • Quick access to cash owed
  • No need to chase up your own unpaid invoices
  • Helps to even out cash flow
  • Debtors may be contacted by your invoice financier
  • You don’t receive the entire value of your invoices

Business Lines of credit

A business line of credit works in a similar way to a regular online term loan, but instead of borrowing the entire lump sum in one go and paying interest on the lot, you only borrow what you need and pay interest on that amount.

At the beginning of the loan, you will agree a ‘limit’ with your lender and the rate at which interest will be paid on your balance. You can then withdraw cash up that limit but you pay interest only on the amount you’ve actually drawn down from the agreed loan limit, rather than the whole amount right away. You may find that you never need to withdraw the entire amount, or that you repay as you go, a little like having a credit card.

Quick look guide – Business lines of credit
  • Flexible access to cash when you need it
  • Good for evening out cash flow
  • Limits your interest charges to the actual outstanding balance
  • Good for smaller businesses with a cautious approach to borrowing
  • Not ideal if you need funding to cover a specific large cost

Merchant cash advance

This is a very specific type of alternative business finance that’s aimed at retailers or service providers that regularly take payments from customers through a card machine. You take out a loan, and repay directly from your takings through your card machine automatically. The percentage of the payments taken to repay the loan is set at the beginning of the loan period and there is usually no limit on the time it takes you to repay the loan.

Quick look guide – merchant cash advance
  • Automatic repayment through your card machine
  • No time limit on repayment
  • Loan values relatively low
  • Check interest rates compared with other types of loan
  • Limited to businesses that regularly use card machines to take payments

Asset finance

Asset finance is the term used to describe business finance that is taken out with assets as security. Often, they are loans that are taken out specifically to pay for large items, against which they are also secured, a little like a car financing deal. These include things like hire purchase, where you pay a certain amount each month to use an asset, such as a piece of machinery, and you own it once you have covered its value.

Asset finance also includes loans that are secured against a large asset. This is also called asset refinancing, and works a little like remortgaging your home. This type of loan can be useful when you need to buy an expensive piece of equipment but can’t afford it outright. However, it is a secured loan, as opposed to an unsecured loan, so the asset you use as security is at risk if you can’t keep up with repayments.

Quick look guide – Asset finance
  • Useful for accessing expensive machinery/equipment
  • Might be accessible to those with less-than-perfect credit
  • You won’t own the item until you have paid off the loan
  • You risk losing an asset if you run into financial trouble

Peer-to-peer and crowdfunding

These are, perhaps, the last bastions of genuinely alternative funding available to business owners. They are both online sources of funding, and both involve gathering finance from a number of different sources until you have the total you need.

Peer-to-peer business loans are usually arranged through an online platform, which brings together a number of investors who want to put their cash into business loans in order to generate a return that’s better than simply investing or saving through a bank. On the flip side, businesses can access the peer-to-peer loans at a better rate than they would be able to access through a bank, so everyone wins.

Although peer-to-peer lending and borrowing is increasingly popular, the investors using these platforms tend to look for impeccable credit histories, and eligibility criteria may be tougher than for other sources of business finance.

Crowdfunding

This works in a similar way to peer-to-peer lending, but the general arrangement is that the funding isn’t repayable by the business. Finance is usually raised using a crowdfunding platform and businesses will put forward their case for funding. Successful crowdfunding campaigns are often linked to project like social enterprise, heritage or charitable work that members of the public can get behind and support.

Quick-look guide – Peer-to-peer and crowdfunding
  • Good rates of interest
  • No need to deal with a bank
  • Borrowing through a supportive community
  • Touch eligibility criteria
  • May be more suitable for social enterprises and projects

Making an educated decision about your business finance is really important. As alternative business finance providers ourselves, we like to work with business owners who are confident that a mycashline online business loan is the right choice for them. We speak openly and frankly with our partners to create a level playing field where both borrower and lender feel they are on an equal footing. And we consider this to be the true spirit of alternative business finance.

Caroline Ramsey

Caroline Ramsey, Editor

Caroline is mycashline’s business and finance editor and doubles as our copywriting whizz.

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