As a business owner you might have already asked your bank for a business loan. According to a report by the British Business Bank, 38% of business owners still go straight to their bank when they identify a need for external finance. But since the financial crunch of 2008, the banks have been reluctant to lend to small businesses.
Many businesses will need external funding at some point in their journey, whether it’s to smooth out cashflow gaps, fund business growth, or acquire new machinery. The problem is, a lot of entrepreneurs still don’t know that there are many business finance alternatives out there if it doesn’t work out with your bank. Let’s look at a few types of non-bank lending available on the market.
When you apply for alternative finance, every lender will go through a process of due diligence. The lender will need to check your creditworthiness by looking at your bank statements, annual turnover, and profit margin, as well as your credit rating.
Another key fact you should be aware of is the trading history of your business. Most lenders will want to see a trading history of at least 1-2 years, and use this as an indication of your eligibility. In some cases, you’ll also have a chance to talk to the underwriter to explain certain aspects of your company’s history.
Having said that, some providers offer loans to startups, and there are also specific products, such as invoice finance, which are based more on the creditworthiness of your customers than your trading history.
Unsecured business loans
If your business doesn’t own any assets like machinery or vehicles, an unsecured business loan may be a good solution. As the name implies, unsecured business loans don’t need any security and are instead based on the overall financial picture of your business.
This means you’ll need to demonstrate good affordability, and unsecured loans may also be more expensive, because the lender takes on more risk.
Additionally, with no security in the background most lenders will want you to give a personal guarantee. Put simply, this means you agree to repay if your business can’t, so you should think carefully and speak to a lawyer before signing anything.
Revolving credit facilities
Revolving credit facilities work similarly to a business credit card. You’ll have a pre-approved credit limit from which you can draw down funds, and interest only needs to be paid on the outstanding amount. This means you’ll have a ‘rolling agreement’ with the lender instead of a fixed loan, and can take funds whenever you need them.
This type of finance is popular for its flexibility, but since revolving credit facilities are another form of unsecured finance the interest rates tend to be higher. That doesn’t necessarily mean the total cost of finance will be higher — if you only use the funds some of the time, it can work out cheaper than a fixed business loan.
Merchant cash advances
Sometimes, businesses may not be eligible for an unsecured business loan yet. But if they use card machines, a merchant cash advance could be a good option. They’re ideal for firms with a high volume of card transactions every month, such as retailers or businesses in the leisure and hospitality sector.
With merchant cash advances the total cost is agreed upfront, and the amount you repay is taken as a percentage of future sales. This means your repayments go up and down with your overall takings, which can be a really useful thing for businesses with unpredictable revenue.
You also won’t have to worry about missing repayments, or interest building up, because repayment is handled automatically between the lender and your card terminal provider.
Merchant cash advances are relatively expensive compared to other types of unsecured funding — but if this kind of flexibility is what you’re looking for, they may be worth a go.
Lots of UK businesses struggle with long payment terms, which can sometimes put cashflow at risk. If you’re regularly waiting for money from customers, invoice finance could help you secure additional funding.
With invoice finance you can access finance when you haven’t been paid for your last job yet, but need to fund your next one. This can often be the case when your business has long payment terms, which may be as high as 90 days or even more.
You’ll be given an advance based on the value of outstanding invoices, usually around 85% of the amount you’re owed, and you’ll get the remainder minus the lender’s fees as soon as the invoices have been settled by your customers.
This makes invoice finance a useful way to smooth out cashflow, and it can tide you over to the next payment so you can move forward with your business.
Peer-to-peer business loans
Peer-to-peer lending is already well-known. This kind of alternative finance connects businesses looking for funds with various private investors. Essentially, you’ll get a business loan, but instead of only one lender the funds are coming from several individuals.
In theory, both investors and borrowers get a better experience than with their bank, which is why this option is popular. Bear in mind though, peer-to-peer lending platforms tend to have rigorous eligibility processes to protect their investors, and less glamorous companies may struggle to attract investors.
A real-world example
Indie Brands is a distributor of independent premium spirit brands, curating a portfolio for the UK’s best restaurants, bars, hotels, and retailers.
The company was growing very quickly, which meant the funding they had in place simply wasn’t sufficient enough. Founder and MD Doug Cunningham was looking for a loan to boost the business’s growth, but his bank said ‘no’ — even though the company had been profitable ever since inception.
Funding Options found Doug the right lender to finance the expansion of his company. In the end, peer-to-peer lending was the most suitable option, which allowed Indie Brands to buy additional stock and hire more staff.
There are many different types of alternative finance out there for many different industries and sectors, and it can be difficult to identify the most suitable one for your situation. If you’re on the lookout for external funding, matchmaking services like Funding Options can help narrow down the search — whether you’re looking for long-term funding, or just something to smooth out cashflow gaps.