There’s a huge range of alternative finance available nowadays, with new products and specialist lenders appearing all the time. Peer-to-peer lending is the best-known by some margin, with the likes of Funding Circle, RateSetter, CrowdCube, Zopa, and many more offering to match investors looking for a better return with businesses looking for funding.
Compared to alternative finance as a whole, peer-to-peer represents a small fraction of the market — yet it receives a disproportionate amount of media coverage and public awareness compared to equally useful alternative finance products.
Perhaps it’s not surprising that peer-to-peer lending is winning the awareness war. After all, the competition for the title of best-known alternative finance product also includes entries like the decidedly uninspiring merchant cash advance, and the even-duller-sounding pension-led funding.
Don’t get me wrong, these are both valid and useful products for lots of businesses in specific circumstances, but it has to be said — such terminology is hardly designed to capture the public’s imagination.
This is something of a problem. What alternative finance does best is offer a range of granular choices for a huge variety of different businesses at different stages in their lifecycle — in start contrast to the one-size-fits-all approach the banks have had since the recession in 2007–8.
So if a small business only knows about peer-to-peer lending — or worse, considers it the beginning and end of alternative finance — they might never secure the funding that could help them get to the next level.
There really is much more to alternative finance than peer-to-peer lending: here are just a few examples.
A new approach to assets
For businesses that need to purchase assets, alternative finance offers a massive array of choice. There are providers that specialise in specific sectors and equipment types or offer used equipment rather than new equipment. Asset finance is a very broad term, and within it there are agriculture machinery specialists, catering equipment funders, and even lenders set up for the soft play sector.
And it’s not just a wide variety of equipment that can be funded. Many alternative lenders are using asset valuations to ‘unlock’ capital for businesses that are asset-rich but cash poor — even if those assets are less attractive than those the banks tend to favour, such as commercial property or vehicles. Alternative asset refinancing can even extend to niche items like large-format printing presses, yellow plant machinery, and laser cutting tools.
On the other side of the coin, firms without valuable assets to borrow against are offered more flexibility by alternative finance. With no assets available to use as security for a refinance, the banks are restricted from lending more than about £50,000.
But fast-growing firms in sectors like technology or business services often look to raise six-figure sums to grow and don’t have much more than IT equipment and a rented office. For these companies, alternative finance offers unsecured lending based on less tangible things like the business’s potential and credit history — giving promising high-growth firms another route to growth finance.
Alternative finance for every sector
Alternative finance can get much more granular than simply ‘assets or no assets’. For example, merchant cash advances (their uninspiring name aside!) can be extremely useful for any firm that takes revenue using a card terminal. Merchant cash advances occupy the grey area between secured and unsecured lending because the amount lent is based ’secured’ on recent months of revenue, but repaid flexibly as a percentage of future revenue through the card terminal.
In this way, a merchant cash advance is not only a tailor-made fit, but it also leaves cash flow intact — rather than a rigid repayment schedule, the business pays less in bad months and more when the going is good. Finally, with repayments taken at source, there’s little management overhead and the repayments can feel relatively painless for the business.
In terms of eligibility, the main requirement is receiving revenue through a card terminal — which means it’s a form of alternative finance that can help firms in retail, leisure, and hospitality. All of these sectors have struggled to secure funding from the major banks in recent years.
Meanwhile, pension-led funding can potentially fit any business if a company director has a pension they’d like to use to lend to their business. As unappealing as the term might be, pension-led funding is an innovative way of solving the problem of access to finance experienced by many small businesses that have neither the assets for a refinance nor the trading history for an unsecured growth loan.
The typical example would be a company director starting a new business — who lacks the track record to secure traditional funding, but might have money in a pension that they’d like to use to lend to their new business.
New forms of old favourites
Merchant cash advances and pension-led funding are two examples of innovation in alternative finance — but there are also innovative new takes on well-worn types of lending.
For example, invoice finance is very much a mainstream product, but alternative finance providers have rejuvenated it into different packages suitable for a wider spectrum of sectors and firms. Firms that trade on credit with other businesses have the option to auction their unpaid invoices online; finance individual invoices quickly or even combine invoice finance with another form of finance in a tailored package for the business.
Have you read all the terms?
With all the benefits of alternative finance comes a challenge — with so much choice, it’s hard to know what’s right for your business. Some lenders and products are transparent and easy to understand, but others can be more difficult.
It’s important to do your research and read all the terms to ensure you know what you’ll end up paying. One benefit of such a broad market is you’re not forced into one product because there’s often a second or third option. There are also many other things to consider besides cost, such as the length of the contract, and what happens if you want to repay early.
The breadth of the alternative finance market presents advantages as well as challenges. On one hand, more choice than ever means it’s more likely you’ll find the right finance for your business. On the other, the variety of options means you’ve got to do your research to make sure you find the best option — not simply the option you know the most about.
In fact, it’s for this reason that I started Funding Options — matching and comparison sites like ours can be a fast track for business owners to narrow down the products that will work for them quickly and easily.
There really is a lot more to alternative finance than just peer-to-peer lending — and although some other products aren’t as glamorous or appealing, they could well be a better fit for your business.
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