Alternative Finance

Alternative finance has become a prominent contender in the business lending arena over the past few years. But what exactly is it and how does it work?

What is alternative finance?

Alternative finance refers to any type of business finance which isn’t provided via a traditional bank. The types of loans available through alternative finance are vast and varied, including business finance in the form of cash flow loans and invoice financing.

This type of lending has grown rapidly in the past few years, with a wide range of lenders and products currently available to businesses. 

How does it work?

Most of the money supplied to businesses from alternative lending companies is generated through loans and investors. Due to the rise in fintech, alternative lenders use detailed algorithms, risk assessment models and relevant data to aid and speed up their approval process, meaning they may be able to approve applications which traditional banks would reject.

In addition, most alternative finance lenders allow you to apply over the telephone or through a simple form on their website as opposed to setting up a physical face-to-face meeting. If you’re able to provide all the information needed in a timely manner, and your business is approved, many alternative lenders will be able to provide funds within a matter of days.

Alternative finance vs traditional bank loans

There are several reasons why businesses are turning to alternative lenders in place of traditional banks. These include:

The average bank loan takes weeks to complete, with the decision alone taking up to seven days. This can be even longer if your assets need to be valued against a secured loan. In comparison, alternative lenders can send you a decision-in-principle - and sometimes even the funds - in as little as 24 hours.

From application through to receiving the funds, the entire process of applying for alternative finance is considered much quicker than conventional bank lending. This allows businesses the flexibility and freedom to capitalize on opportunities otherwise unavailable to them, such as purchasing exclusive stock or covering the cost of a time-sensitive marketing campaign.

Different criteria
Many businesses who are turned down for a typical bank loan find that they are in fact eligible for an alternative business loan. This is down to the fact that alternative lenders value slightly different criteria compared to banks when underwriting a loan.

For example, while a bank may have strict rejection policies based on an applicant’s credit history, an alternative lender may instead consider trading history, cash flow and even online reviews in the first instance.

Less paperwork
Most alternative lenders are based online and encourage companies to apply for finance through their website or over the phone, side-stepping the cumbersome back-and-forth of paperwork which is synonymous with historic bank loans. 

Any documents which are required are usually sent securely through an online portal, omitting the need to lug paperwork down to the bank and fill in forms left, right, and centre. In fact, many applications can be completed without leaving the comfort of your office.

More choice and flexibility
There are plenty of alternative finance lenders in the market, with even more emerging as the industry continues to gain momentum.  Alternative lenders tend to specialize in one form of finance, such as unsecured loans, invoice financing or merchant cash advances

This means that their products are tailored to customer needs, varying in repayment terms, interest rates and loan size, so you can choose the type of finance that works for your business and its needs. Consequently, alternative lenders have a reputation of being more flexible than the average bank; many alternative finance products won’t have the costly fees and early repayment penalties associated with bank loans.  

So why do businesses still go to the banks?

Ultimately, it comes down to three aspects: a lack of awareness, interest rates and an old-fashioned sense of security.

According to a recent survey by the British Business Bank, there is still an overall deficit of information available to small businesses around the alternative finance options available to them. The report also revealed that SMEs lack confidence when approaching lenders, as up to 70% of SMEs are willing to forgo growth rather than take out a business loan. This general lack of awareness around how alternative lenders can offer tailored finance, coupled with the reticence to even approach lenders, means that businesses often have a blind spot when it comes to noticing the wealth of funding options available to them.

Secondly, because banks have access to a larger pot of capital, they are usually (but not always) able to offer slightly lower interest rates than their alternative finance counterparts. If you’re leaning towards a traditional loan for this reason alone, bear in mind that banks typically have higher upfront fees and harsher repayment penalties than alternative lenders, so be sure to explore all of your options thoroughly.

In addition, despite offering less flexibility, there are many business owners who still opt for the time-held bank loan with what they consider to be a household name. This is also often accompanied by a sense of security in going for a traditional option which has been around for longer. This leads on to the next point of…

Common misconceptions

Some wrongly assume that ‘alternative’ and ‘unsecured’ are allusions for ‘unregulated’ and ‘unsafe’. On the contrary, alternative business funding is completely safe and secure so long as you ensure you’ve chosen a reputable and reliable company. Always complete your due diligence by browsing the lender’s online reviews and carefully checking their reputation and payment terms. It’s also a good idea to ensure the company has a viable physical address. If you’re ever uncertain, consult the Association of Alternative Business Finance, who set the standards of best practice in financial services.

Another misconception is that alternative finance is only an option if you’ve been rejected for a bank loan. Although banks are legally obliged to direct you to government-designated alternative lenders if they reject you for finance, an increasing number of SMEs are choosing to sidestep banks altogether for a funding solution that’s more straightforward. 

Alternative Finance Options
Alternative Finance Options:

There are plenty of alternative finance options for business owners - many are now sidestepping banks altogether.

Types of alternative finance

There are a wealth of products available to those looking for alternative business finance, including business loans, asset finance and invoice finance. These are facilitated through peer-to-peer lending or from a lender’s own balance sheet. 

Unsecured and secured business loans
Business loans are normally defined as either unsecured or secured. Unsecured business loans are generally more popular. They usually come with slightly higher interest rates as they don’t require any assets as security, but you may still need a personal guarantee. This also means they are quicker to be approved, as your assets don’t need to be valued.

Secured loans are usually higher-value and require you to offer something, such as a property, as collateral in case you are unable to repay. They may have lower interest rates as a result and can also be a good option for companies with a blemish on their credit history, as valuable assets will be able to offset this.

Crowdfunding is mainly used for funding start-ups or business launches. Essentially, it refers to the method of raising a large sum of money through many individuals investing a small part each, as opposed to one lender providing the whole sum. 

There are a couple of types of crowdfunding such as rewards-based, which involves contributors exchanging investment for a service or product. Equity-based crowdfunding, on the other hand, involves contributors becoming part-owners by trading capital for equity shares.

Peer-to-peer lending
Peer-to-peer lending is loosely based on the concept of crowdfunding, with small businesses seeking funding from multiple investors. It’s considered to be a straightforward and low-risk form of debt funding and has experienced a surge in popularity over recent years.

It involves businesses putting themselves before a panel of investors via a digital platform. Investors can choose which companies they’d like to invest in along with the amount they want to put forward. Once the business reaches its target of funds, they receive the money and begin to repay interest at an agreed rate.

Revenue-based financing
Revenue-based financing involves providing finance to a business in exchange for a share of its future revenue. This is an ideal solution for companies who are looking for partnership or limited company loans.

The most common form of this is a merchant cash advance. However, this can be quite an expensive solution as it involves offering a lump-sum in exchange for a percentage of credit and debit card sales. There are other variants of revenue-based financing to consider, such as the Revenue Advance, which calculates the size of a loan based on all sales as opposed to just credit and debit card sales.  

Invoice financing
Invoice financing allows small businesses to borrow money against outstanding invoices before they’ve been fulfilled by customers. This involves a third-party lending money against the invoice for a fee. Invoice financing is a common and effective way to free up cash flow when the restraints of late payment by customers are inhibiting growth. 

The concept has been around for a number of years so there are a couple of modern upgrades to the traditional invoice financing model which are quicker and more flexible. Peer-to-peer lending is one such example which may allow lenders to fund a higher percentage of the invoice compared to traditional invoice finance models. 

How we can help

At Fleximize, we’re experts in providing tailored finance solutions to businesses looking for an alternative to the big banks. We can lend up to a maximum of two times your monthly turnover, including unsecured loans of up to £250,000 and secured loans of up to £500,000. For a full breakdown of the alternative business loans we can offer you, browse our services or speak to a relationship manager on 0207 100 0110.

For more information on how we’ve been able to help hundreds of businesses who were rejected for traditional bank loans, take a look at our customer case studies and Trustpilot reviews

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