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SME Alternative Business Finance for a Growing Business

Anyone that runs a small business will know that finances are often the trickiest part. Funding a venture isn’t easy and sometimes, you just need a little helping hand to get the ball rolling. 

Traditional bank loans don’t work for everyone – they can be a lengthy and complex process. If this sounds familiar, perhaps it’s time to look into the alternative forms of finance out there for your business. There will be an option that’s perfect for you – it’s just a case of doing your research. Here’s a few of the most popular options and how they work…

Crowdfunding & peer-to-peer lending

These are two different products but are often referred to in the same sentence as they do share similarities. Let’s start with crowdfunding. This usually works in one of two ways; reward-based crowdfunding or equity-based crowdfunding. Reward-based crowdfunding is when lenders invest in your business and instead of repaying them, you offer them a reward of some kind. If for instance you run a restaurant, you could offer your lenders a lifetime or free or discounted meals.

Equity-based crowdfunding works by entrepreneurs and very young companies offering shares in their business in exchange for an upfront investment loan. It’s slightly more risky because it depends on the business becoming successful. If it isn’t, the shares won’t be worth anything and the business will have nothing to repay – which is bad news for investors.

Moving on to peer-to-peer lending. This form of alternative finance is popular because it’s arguably lower risk for investors. It cuts out the middleman, so it’s great for businesses who want to avoid high interest rates and the extensive financial checks from the bank. Peer-to-peer gives a business access to individual investors who are willing to lend their own money for an agreed interest rate. It sounds great – and it is – but it’s worth noting that this finance is not secured by any government guarantee. It’s requires a little more time, effort and risk than your bog-standard brick-and-mortar lending scenarios.                                                

Invoice finance

This is when a third party agrees to buy a businesses unpaid invoices for a fee. It’s great for small businesses that need a steady cash flow and can’t rely on all their invoices being paid on time. Invoice financiers can be in the form of a specialist independent company, part of a bank, or one of more individuals. In that sense, it draws similarities to crowdfunding.

There are three different types of invoice financing. Firstly, invoice factoring. With this method, your invoice financier will ‘buy’ the debt owed by the customer when you raise an invoice. They take a percentage of this debt as interest, which is where they make their money. They make the remainder, usually around 85%, available upfront. This leaves a business with a steady cash-flow and the financier gets a cut of your sales. 

Next up is invoice trading. This is similar to invoice factoring, but this method instead uses online platforms to allow businesses to bypass traditional financiers and obtain finance from individual investors instead, similar to peer-to-peer. 

Lastly, there’s invoice discounting. With this, the invoice financier doesn’t manage your sales ledger or collect debts on your behalf. They instead lend you money against your unpaid invoices for a pre-agreed fee. This leaves you responsible for collecting debts and you remain as the point of contact for your customers, meaning the fact that you’re borrowing money can stay confidential.

Merchant cash advance

A merchant cash advance is a form of finance that works through a business’s credit or debit card transactions. If a business makes significant revenue via their card payments terminal, as opposed to invoicing customers and receiving bank transfers, a merchant cash advance would be an ideal form of alternative finance. This could be businesses such as shops, cafes, restaurants and salons.

If a business is in good health and of course, receives most of its payments via a card terminal, there shouldn’t be too many problems obtaining this source of funding. It’s known for having high approval rates. You can usually borrow the equivalent of your average monthly turnover, and it is repaid via a small proportion of each card transaction – typically 10-15% – being paid directly to the provider until the total amount has been repaid.

You only pay back as much as you can afford to. If a business goes through a quiet period, it will pay less money back. In a busy period, it will pay back more. That’s one of the big draws of a merchant cash advance; there’s no need to keep a certain amount of money to one side to pay back on a set date.    

Unsecured business loans

An unsecured business loan is pretty much what it says on the tin. Whereas a secured loan uses assets such as real estate or equipment to fall back on should things not work out, an unsecured loan is based purely upon the creditworthiness of the borrower. It’s a good option for businesses that don’t own many assets, who would prefer not to offer security and who are growing fast and need finance quickly, perhaps in order to increase marketing budget.

In an ever growing digital world, more and more companies have intangible assets which makes offering collateral quite difficult. All many small businesses need these days are a rented office and some computers – they don’t often have any other assets. This is where unsecured business loans become pretty handy. Due to the lack of security, lenders will often ask for a personal guarantee, usually from the company director, to cover their back. It’s a quick process with no valuations, although it’s important to remember that the overall costs are usually higher, due to the heightened level of risk.

If you want to know more about any of these alternative forms of finance, Choice Business Loans can help and are more than happy to answer any questions. Head to https://www.choicebusinessloans.co.uk/ and begin the process.

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