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The Basics of Alternative Business Finance
by Startacus Admin
‘Bank’s remain rather unwilling to lend’... I know, shocking!
It’s become something of a cliché now hasn’t it? The intrepid entrepreneur, in valiant search of business finance, only to find themselves repeatedly rejected like a Woolworth’s loyalty card.
Indeed, despite what it might say in their window displays, big banks remain highly reluctant to part with their cash, especially when it comes to small and medium businesses.
This has created rather a tricky set of circumstances for UK enterprise. Recent reports have shown that British entrepreneurship has reached an all time high, with over 5 million micro-businesses currently operating, and contributing 19% of total UK business turnover.
The Traditional Finance Problem
Despite this explosion the number of small businesses, banks have remained steadfast in their perception of them as risky investments; as a result they have risked stifling potential growth. This is where alternative finance can step in to lend some much needed budgetary backing.
It’s a topic at the centre of much online discussion at the moment so it can be quite tricky to separate the sound reliable advice from the waffle. We have found this well sourced and comprehensive guide to alternative finance, from business finance specialistsMerchant Money, to be a particularly good resource for gaining a better appreciation of this fast growing market.
But for now, let’s look at some of the basics!
What is Alternative Finance?
You may or may not be surprised to learn that just 44% of small business owners are familiar with alternative finance, and just 9% have actually secured (or tried to secure) funding through these routes.
Alternative business Finance simply refers to a means of accessing financial support for a business in a way which differs from the traditional enterprise finance routes associated with the banking sector. In times gone by, opportunities for alternative finance were pretty meagre, but with the advent of the internet and massive growth in the digital sphere, a whole host of new small business finance options have appeared and developed. In fact it has been estimated that the UK's alternative finance market was worth £1.74Billion in 2014, with a sharp rise expected once again this year.
Such is the rate of growth experienced within this market that there is growing consensus that non-traditional finance routes are actually disrupting the banking sector. This is because, aside from the difficulties of being approved for a business bank loan, alternative finance routes also offer a number of other potential benefits including;
Levels of funding are often very flexible, ranging from relative small amounts to very large
The process of applying for such funding is usually more straightforward
Statistics show that your application is more likely to be accepted
The terms of such finance options are often well tailored to businesses
What are the types of alternative finance?
The different forms of alternative finance available to small and medium enterprises are numerous and varied; we have selected a few of the lending models to give you a flavour of the market.
Peer-to-peer business lending-This is an area of alternative finance which has all but tripled in size in the past 2 years! It refers to loans made by individuals to businesses in need of capital input to facilitate growth. It can often involve a number of individuals contributing smaller amounts to make up a complete loan package.
Peer to peer consumer lending- This is very similar to peer-to-peer business lending and is a process whereby businesses use an online platform to borrow money from a number of lenders, each of whom lend a small amount towards the final total needed.
Invoice trading- This is a really interesting form of alternative finance which has become increasingly popular in recent years as firms seek to quickly reinvest financial gains to encourage fast and sustained growth. They do this by selling / auctioning off their unpaid invoices to a pool of investors, allowing them to receive funds almost immediately rather than waiting for invoices to be paid. They sell the invoices at a discount meaning that investors recoup a profit when they are finally paid.
Equity / reward based crowdfunding- These have grown into one of the most successful alternative finance routes for a huge variety of early stage businesses, small businesses, startups, and businesses with high growth potential. Crowdfunding (as its name suggests) is the process of funding a project or business venture by raising money from a number of people. It takes place on social network style websites called crowdfunding platforms. Crowdfunding usually falls into one of two categories A) Equity based crowdfunding, and B) Reward based crowdfunding.
A. Equity based crowdfunding describes when investors are offered an equity share of the business in exchange for their financial contribution
B.Reward based crowdfunding refers to cases where ‘the crowd’ are given products or services as a reward for having made an investment. These products are usually something directly connected to the campaign, the value of which is determined by the level of investment made.
There are many more forms of alternative finance available to SMEs and Nesta has compiled a very comprehensive report explaining the details of some of the more common ones that you might like to consider!
Hopefully this quick examination of alternative business finance has helped give you a better sense of what it is all about.