The benefits of alternative finance

Today, there is a wealth of alternative finance options that threaten to eclipse the offering of banks in terms of attractiveness to small companies. Here, Sharon Argov looks at some of the benefits of the modern way to finance.

Alternative finance is a fast-growing and vibrant avenue for small businesses seeking funds. It only seems like yesterday that Funding Circle arrived on the scene with its peer-to-peer lending offering.

In 2010, that idea seemed a little ahead of its time, and it did seem to take a while to catch on; indeed the sector arguably suffered from a lack of effective marketing in the early stages while budgets for such exposure were low.

But come 2013, an estimated £193 million in loans was offered to business via peer-peer-peer lending, a 200 per cent increase on the previous year, and now Funding Circle alone has financed businesses to the tune of £741,470,300 and rising.

Today, the market is full of exciting and varied offerings for funding, ranging from equity crowdfunding to innovative invoice platforms and, of course, debt offerings. There is so much choice, and of course that choice means competition and therefore more reasonable terms for businesses.

Could there even be too many operators jostling for position now? Well, this influx of new alternative financiers in the market comes at a time when the number of small business start-ups is increasing, so arguably not.

It is estimated that every year more than 500,000 new small companies are being created in the UK alone!

Furthermore, according to a recent study by property-based lenders Amicus, the popularity of alternative lending, such as peer-to-peer funding, equity crowdfunding, and business cash advances, is likely to increase by an estimated 26 per cent in the next two years.

This looks promising, especially since £1.74 billion was raised via alternative finance methods in 2014.

Alternative funding has manifold benefits. Firstly, it offers funds in a speedy manner. Bank finance, for instance, can take weeks or months, from application to approval, but many forms of alternative finance can approve the funds in a single day – an essential factor when so many companies rely on an injection of money immediately, whether that is because of tight cash flow or time-constrained expansion projects.

More freedom is arguably afforded to businesses through the alternative finance route; alternative financiers do not display the same level of intense scrutiny as banks in regard to asking for a backlog of accounts and figures to ascertain suitability, and there is full responsibility on the part of the business owner to use their funds as they see fit, rather than being dictated to about how the money is spent.

When it comes to banks, steep monthly repayments can be the order of the day, but with alternative finance this isn’t an issue.

For example, merchant cash advances work by linking borrowed funds to the businesses card payments. Payments are made as a percentage of card payments taken meaning you only pay back the advance when your customers are coming through the door.

Therefore, advances are paid back at affordable rates and dependant on the business increasing its customer spend.

This type of funding allows the borrower time to breathe and increase their business with no pressures of repayments.

Also, the fact that P2P operators match lenders to recipients means that the lender is likely to have more knowledge of the industry they are investing in.

Lenders can also decide to invest at their own free will and choose companies based on their social, financial or industry features. It’s the of the business world.

When seeking the right operator to go with, there are many considerations to make. Naturally, you have to be clear about whether to go with debt or equity, influenced by such decisions as whether you want to give away a chunk or your company, or you are comfortable taking on a level of debt in lieu.

But more specific considerations might be whether you need to access items of equipment in order to develop and grow, in which case asset finance could be your choice. Or if you need the money purely to assist cash flow, then you might consider an online invoice discounting solution. There really is a finance option for every need.

See also: How to get a business loan in 5 steps

Ben Lobel

Delphine Hintz

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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