Business finance has evolved a lot in the last ten years. Following the 2007/8 financial crisis, banks became reluctant to lend to small and medium-sized businesses. A decade on and that hasn’t changed much; what has changed is the emergence of alternative finance for businesses.
Smaller challenger banks and niche finance providers are now offering more options and greater flexibility than businesses have ever had. And there are even federally mandated schemes designed to give businesses the best finance for their needs.
Here we’ll introduce you to alternative finance and how you can use it.
Unsecured business loans
Loans are a staple of business finance. They’ve been around for as long as the banks and they’ve endured because they’re pretty straightforward.
If your business is young, an unsecured business loan could become your next funding option. Unsecured loans don’t require any collateral like property or vehicles because they’re based on your business’s trading performance. Remember that since there’s no collateral involved, the lender carries more risk if you take out an unsecured loan. This can mean the interest rates tend to be higher than a secured loan and that credit limits are lower.
Merchant cash advance
Retailers and merchants find merchant cash advances really useful. They’re also really useful for businesses that don’t have a lot of assets that they could otherwise use as collateral for a secured loan.
A merchant cash advance is a loan based on payments from card machines. The lender takes their repayments directly as a proportion of each sale made using a card machine. The beauty of a merchant cash advance is that the amount you pay goes up or down depending on your overall revenue, meaning you’ll repay what you can afford at that time.
Interest on a merchant cash advance is determined upfront and you’ll continue to pay – usually between 10-20% of monthly sales – until you reach that figure, however long that takes. That way you won’t have the worry of interest building up to an unmanageable amount. However, compared with other types of finance, merchant cash advances can be relatively expensive because of this flexibility.
Many businesses send invoices to customers which are paid at a later date. This results in a gap between those businesses providing their service or product and receiving the payment for it, which can lead to cash flow issues. That gap can be anything from 14-90 days.
This is where invoice finance comes in to save the day. The lender gives you most of the amount owed to you through an invoice, and you repay the lender when the customer has paid you. With invoice finance, you can continue to run your business day-to-day without the pain caused by a gap in cash coming in.
Crowdfunding and peer-to-peer lending
A particularly recent addition to the world of alternative finance is crowdfunding. This is a way for businesses to get finance from a number of individuals, where the investors might take a small percentage of equity in the business or donate simply to support a small business. The point of crowdfunding is to fund businesses in a way that is mutually beneficial for the businesses and the investors – businesses have easier access to finance while investors can increase their investment portfolio and support a variety of small businesses without the need for a middleman.
Peer-to-peer lending is broadly similar to crowdfunding, except rather than involving equity purchasing or donation it’s a standard loan, just from several sources at once rather than from a single provider.
In 2018, Open Banking was launched after the Competition and Markets Authority mandated that big banks must give businesses more opportunities to get the right finance for their situation. Through Open Banking, businesses or individuals can give authorised providers secure access to their bank transaction data, making the process of applying for finance faster and easier.
What Open Banking means for businesses is that smaller, more specialist finance providers are now better equipped to support them when they’re looking for finance. The tech smoothes out the application process so that businesses don’t need to use valuable time scanning physical copies of statements. Instead lenders and other finance providers can get that information directly from the banks (with the business’s or individual’s express permission), allowing business owners to get on with what they do best: running their business.