Alternative Finance Solutions for UK Businesses - Fleximize

Alternative Finance Solutions

Alternative finance is a popular option amongst UK SMEs looking for flexibility and funding that's tailored to their needs. But what exactly is alternative finance and how does it work?

Searching for flexible ways to fund your UK business at a low cost? If so, alternative finance may be just what you need.

Gone are the days when business owners had no choice but to borrow from traditional lenders. Fintech has helped to reshape the business lending landscape with modern methods of financing that are quickly moving into the mainstream.

Whether you’re grappling with lengthy payment terms, faced with expensive equipment costs, or in need of short-term cash flow support to mitigate the recession, there are plenty of options available to you.

Read our guide to better understand what alternative business finance is, and how it can be utilised to grow your business from strength to strength.

What is alternative finance?

Alternative finance is an umbrella term that refers to any type of finance which isn’t provided via a traditional bank. The types of loans available through alternative business finance are varied, designed to support individual business needs and mitigate industry-specific challenges.

This type of lending has grown rapidly in the past few years, with a wide range of alternative finance providers and products currently available to businesses. A couple of examples of alternative financing include:

Invoice finance: designed to alleviate cash flow challenges that particularly impact industries construction, manufacturing and recruitment (to name a few)

Revenue-based finance: an alternative way to raise non-dilutive funding from investors, well suited to ecommerce, subscription and technology businesses

Short term business finance: a solution for SMEs that need funding but don’t want to repay the debt over several years, these short term loan alternatives can typically be paid back over 3 - 12 months.

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Is alternative business finance regulated?

In the UK, most financial service activities require authorisation by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA).

This means that alternative lenders providing business finance must first check to see if they need to qualify as an authorised lending firm. If they do, they must comply with the authorities’ rules and regulations.

How to borrow safely:

The UK alternative finance market is set to reach £3.64 billion in 2023, yet many SME business owners remain unfamiliar with this space.

As a result, some wrongly assume that ‘alternative’ and ‘unsecured’ are allusions for ‘unregulated’ and ‘unsafe’.

On the contrary, alternative business funding is completely safe so long as you ensure you’ve chosen a reputable and reliable company.

Always complete your due diligence by:

If you’re ever uncertain, consult the Association of Alternative Business Finance, who set the standards of best practice in financial services.

What are examples of alternative lending?

There are a wealth of products available to those looking for alternative business finance in the UK, including business loans, asset finance and invoice finance. Facilitated through peer-to-peer lending or from a lender’s own balance sheet, alternative lending offers companies greater accessibility to flexible financing.

These are the main types of alternative sources of finances for SMEs to consider:

1. Term loans

A term loan is a type of alternative lending that provides a business with a specific amount of money that then gets repaid in instalments over a specific period (the term).

Alternative small business loans are normally defined as either unsecured or secured, depending on whether they require collateral.

Unsecured business loans are generally more popular, because although they tend to come with slightly higher interest rates, they don’t require any high-value assets to be put forward as security.

This also means they are quicker to be approved, as your assets don’t need to be valued by a third party. However, to reduce the lender’s risk, unsecured term loans can require a personal guarantee to be signed before the money can be borrowed.

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In comparison, secured business loans are usually higher-value and enable businesses to borrow large amounts of money.

This type of term loan requires you to offer assets (such as a property, equipment or vehicles), as collateral in case you're unable to repay. Due to this, they may feature lower interest rates.

In addition to helping businesses secure larger loan amounts, putting forward valuable assets can help to offset poor credit, which makes them a good option for companies with an inconsistent credit history.

apply to borrow up to £500,000

2. Crowdfunding

Crowdfunding is mainly used for funding start-ups or business launches. Essentially, this type of alternative finance is achieved by 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 to consider:

Also referred to as ‘seed crowdfunding’, rewards-based funding helps to build brand awareness and offers opportunities to increase customer loyalty.

Equity crowdfunding, on the other hand, is typically offered by business angel investors, venture capitalists, Initial Public Offerings (IPOs) and individuals. While a business gets the benefit of investor expertise, this type of crowdfunding dilutes company ownership.

3. Peer-to-peer lending

Another popular alternative to traditional lending is peer-to-peer lending. Also referred to as ‘P2P lending’, this method of borrowing 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 that has experienced a surge in popularity over recent years.

This type of alternative financing for small businesses involves putting your company 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.

4. 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 alternative lending solution for companies who are looking to borrow money without losing equity or giving away ownership.

The most common form of borrowing against future revenue is a merchant cash advance. Suited to businesses that experience fluctuations in cash flow, this type of alternative lending is popular among restaurants, retailers and tourism enterprises.

However, this can be quite an expensive solution as it sees the lender offer a lump sum in exchange for a percentage of credit and debit card sales.

    Rewards-based: Involves contributors exchanging investment for a service or product.

    Equity-based: Involves contributors becoming part-owners by trading capital for equity shares.

    Invoice finance

    An ideal option for firms that experience lengthy payment terms, invoice financing allows small businesses to borrow money against outstanding invoices before they’ve been fulfilled by customers.

    This type of alternative funding 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:

    5. Invoice finance

    An ideal option for firms that experience lengthy payment terms, invoice financing allows small businesses to borrow money against outstanding invoices before they’ve been fulfilled by customers.

    This type of alternative funding 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:

    Invoice discounting offers funds to be raised confidentially, without customers becoming aware of the agreement

    6. Asset finance

    This type of alternative finance can be divided into two main groups: asset refinancing and equipment finance.

    Asset refinance is an alternative loan that works similarly to a secured loan, as it uses valued business assets as collateral for borrowing.

    The main difference between asset refinancing and secured loans is that asset refinance allows businesses to put forward partially-owned assets up to the level of equity they have in them.

    Equipment finance uses alternative methods of borrowing to acquire expensive business assets like equipment and machinery. Within this type of asset finance, two main forms exist:


    Despite working well for businesses that use lots of expensive equipment (such as farms, manufacturers and hauliers), these alternative lending agreements can come with various restrictions that can result in businesses incurring financial penalties.

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    How does alternative lending work?

    Most of the money supplied to businesses from alternative finance companies is generated through loans and investors.

    Due to the rise in fintech, alternative finance providers use detailed algorithms, risk assessment models and relevant data to aid and speed up their approval process. This means they may be able to approve applications 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 quickly, and your business is approved, many alternative lenders will be able to provide funds within days or even hours.

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    How does Fleximize's alternative finance work?

    Since launching in 2014, we’ve lent more than £350 million to small businesses all around the UK.

    Our range of alternative funding products can see you borrow a maximum of two times your business’s monthly turnover, including unsecured loans of up to £250,000 and secured loans of up to £500,000.

    Here’s a quick summary of how our flexible finance works:

    For a full breakdown of the alternative business loans we can offer you, browse our services, use our business loan calculator or speak to a relationship manager on 020 7100 0110.

    What are the pros and cons of alternative loans?

    Before deciding whether or not to apply for alternative business funding, it’s important to consider the potential risks and benefits each source of finance can offer your company. Compared to traditional loans, the main advantages and disadvantages of alternative loans generally include:

    Advantages

    Disadvantages

    Online applications, less paperwork

    Requires use of digital technologies

    Greater funding options and flexibility

    Previous lack of awareness among SMEs

    Higher approval rates and alternatives available

    Possibility of higher interest rates being charged

    Quick decisions and access to funds

    Additional fees may be charged by lenders

    Less spending restrictions

    Often perceived to be less trustworthy

    Accessible to a wider range of businesses

    Poor credit can limit a business’s options


    Alternative finance vs traditional bank loans

    For many years, traditional funding systems were the first port of call for business borrowing. However, as alternative funding continues to develop and become more well known, more and more people are harnessing the benefits raising finance through these methods can bring.

    Previously considered to be the last resort for businesses that had been disapproved elsewhere, alternative finance is more and more being recognized for the many benefits it is able to offer.

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

    1. Speed

    The speed at which you’re able to fund growth plans can make all the difference when accelerating a business.

    The average bank loan takes weeks to complete, with the decision taking up to seven days. This can be even longer if your assets need to be valued against a secured loan. In comparison, through alternative lending you can receive 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 such as buying exclusive stock or covering the cost of a time-sensitive marketing campaign.

    2. Different criteria

    Many businesses that get 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 consider trading history, cash flow and even online reviews instead.

    3. Less paperwork

    Most alternative finance providers are based online and encourage companies to apply for finance through their website or over the phone. This sidesteps the frustrating back-and-forth of paperwork which is common with traditional bank loans.

    Any documents which are required are usually sent securely through an online portal, removing 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.

    4. More choice and flexibility

    There are plenty of alternative lenders for your small business, with even more emerging as the industry continues to gain momentum.

    While some alternative finance products and lenders might have stricter rules than others, most funding options can be used in any way that benefits your business. That might include:

    Alternative lenders tend to specialize in one form of finance. This means 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. For example, many alternative finance products won’t have the costly fees and early repayment penalties associated with bank loans.

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    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, while awareness is improving, there is still a lack of information available to small businesses around alternative business finance in the UK.

    The report also revealed SMEs lack confidence when approaching lenders, as up to 73% of SMEs are willing to forgo growth rather than take out a business loan.

    This general lack of understanding 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.

    Additionally, because high street banks have access to a larger pot of capital, they are usually able to offer slightly lower interest rates than alternative finance companies.

    If you’re leaning towards a traditional loan for this reason, bear in mind that banks typically have stricter qualifying criteria, higher upfront fees and harsher repayment penalties than alternative lenders, so be sure to explore all your options thoroughly.

    Do I qualify for Fleximize's alternative business loans?

    You can apply for alternative finance with Fleximize if:

    If you’re a sole trader or a non-limited partnership with less than four partners, you can apply to borrow a minimum of £25,000 through our sole trader loan alternatives.

    Our alternative lending criteria means we won’t automatically turn you down because of inconsistent credit history. We’ll take other factors into account and look at your situation as a whole.

    Why choose Fleximize?

    How to apply for alternative finance with Fleximize:

    It’s quick and easy to apply for our alternative small business loans. There’s no need to wait for an appointment, or fill out reams of paperwork as you might with a bank. Simply complete our short online application form with a few basic details.

    If you pass our initial checks, someone from our team will be in touch to explain the final steps. You could get approved and receive your loan on the same day once we have everything we need.