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• 05 Sep

  Alternative Business Finance

  Alternative business finance (sometimes called AltFi) refers to the range of non-traditional funding sources that are likely to be more available to businesses than traditional bank lending.

  The Rise Of Alternative Business Finance Used To Fund Growth

  Traditional lending routes, such as bank loans, have long been the cornerstone of business finance. However, the availability of traditional financing is changing. With tighter lending criteria, increased regulatory scrutiny, and economic uncertainty, many businesses find securing funding through conventional means challenging.

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  Growth Outpaces Funding

  

  Business growth rates can often outpace the funding level available through traditional financing channels.

  This has led to a rise in alternative business finance options, offering businesses more flexible, tailored, and accessible ways to get financing that can keep pace with your turnover as it grows.

  Understanding Alternative Business Finance

  Alternative business finance refers to the range of non-traditional funding sources available to businesses. These options are typically outside of the conventional banking system and include a variety of innovative financing solutions. The flexibility and accessibility of these alternatives have made them increasingly popular among businesses of all sizes, particularly those that may struggle to secure funding from traditional lenders. 

  FinTech Products

  FinTech products have become a significant component of the alternative business finance category, revolutionising the way businesses access and manage funding. These innovative solutions, which leverage technology to deliver financial services, offer a range of options from peer-to-peer lending and crowdfunding platforms to digital payment solutions and automated invoice financing.

  Unlike traditional banking products, FinTech services are designed to be more accessible, user-friendly, and adaptable to the specific needs of businesses, particularly SMEs. By streamlining the application process, utilising data-driven credit assessments, and providing faster access to funds, FinTech products empower businesses to secure financing with greater efficiency and flexibility, often bypassing the traditional hurdles associated with conventional bank loans.

  Key Types of Alternative Business Finance

  Several key types of alternative business finance are described below with additional resources to help you with each product type.

  The key types of alternative business finance are:

  • Invoice financing
  • Asset-based lending
  • Peer-to-peer lending & crowdfunding
  • Merchant cash advance

  Alternative Business Loans

  Although business loans are traditional products offered by high-street banks, alternative business loans are offered by other financiers such as challenger banks, merchant banks and independent finance companies. These may be a more easily available option if a bank has declined you and you want a loan rather than other forms of alternative finance.

  Invoice Financing

  Overview:

  Invoice financing enables businesses to unlock cash flow by receiving an advance against their unpaid invoices. This approach is ideal for companies needing immediate working capital without waiting for customer payments.

  Learn More:

  For an in-depth look at how invoice financing works and the benefits it offers, visit our Invoice Financing page.

  Asset-Based Lending

  Overview:

  Asset-based lending (ABL) provides businesses with funding by using their assets such as stock, equipment, or property as security. This type of finance is particularly useful for companies with significant tangible assets looking to secure capital.

  Learn More:

  To explore the specifics of asset-based lending and how it might benefit your business, please visit our Asset-Based Lending page.

  Peer-to-Peer (P2P) Lending & Crowdfunding

  Overview:

  Peer-to-peer lending connects businesses directly with individual or institutional investors via online platforms, often resulting in faster funding and more competitive rates compared to traditional loans. Crowdfunding allows businesses to raise capital by engaging a large number of small investors or backers through online platforms. This method is often used for startups, product launches, and businesses with strong community engagement.

  Learn More:

  For more details on how P2P lending operates and the potential advantages it offers, see the British Business Bank page about P2P and also see the BBB page about Crowdfunding.

  Merchant Cash Advances

  Overview:

  A merchant cash advance (MCA) offers businesses a lump sum payment in exchange for a percentage of future credit card sales. This option provides quick and flexible access to cash, making it suitable for companies with consistent credit card transactions that trade using a credit card machine.

  Learn More:

  To understand how MCAs work and whether they’re the right choice for your business, see our Merchant Cash Advances page.

  Other Funding Options

  If you're considering multiple funding options, check out our Business Funding Solutions page, where we cover all available funding methods and financing products to help you find the right solution for your business.

  Advantages of Alternative Business Finance

  Accessibility

  Alternative finance options often have more lenient eligibility criteria compared to traditional banks. This makes them accessible to a broader range of businesses, including startups and those with less-than-perfect credit histories.

  Flexibility

  Many alternative finance solutions offer flexible terms and repayment options. This allows businesses to tailor their financing to match their cash flow patterns and specific needs, whether that’s for short-term working capital or long-term growth projects.

  Speed

  Traditional bank loans can take weeks or even months to process. In contrast, alternative finance options, particularly online-based platforms can offer much faster access to funds. This is crucial for businesses needing immediate capital to pursue growth opportunities or manage unexpected expenses.

  Diverse Funding Sources

  By tapping into alternative finance, businesses are not limited to a single funding source. They can diversify their financial base, reducing dependency on any one lender and spreading risk.

  Potential Drawbacks

  Higher Costs

  The flexibility and accessibility of alternative finance often come at a higher cost. Interest rates and fees can be higher than those of traditional bank loans, especially for high-risk borrowers. However, getting rapid access to cash can often outweigh this.

  Complexity

  Some alternative finance products can be more complex, with terms and conditions that may be harder to understand. Businesses must ensure they fully comprehend the implications of any finance agreement they enter into and brokers are available to provide support and guidance.

  Regulatory Environment

  While less regulated than traditional banking, some forms of alternative finance are beginning to face increased scrutiny from regulators. This could impact the availability and attractiveness of certain products in the future.

  Alternative Company Finance So Far

  Alternative company finance offers a range of options for companies seeking flexibility, speed, and accessibility beyond what traditional bank loans can provide. While these options can be more expensive, their benefits often outweigh the costs, particularly for businesses unable to secure conventional financing.

  As the financial options for UK businesses continue to evolve, the role of alternative finance is likely to grow, providing businesses with more tools to manage their growth and cash flow.

  Below are some FAQs and thoughts about the growing importance and future of alternative company finance.

  FAQs About Alternative Business Financing

  1) What is the main difference between traditional and alternative business financing?

  Traditional finance usually involves bank loans with stringent criteria, while alternative finance offers more flexible, innovative solutions often with faster access to funds.

  2) Is alternative business finance suitable for startups?

  Yes, many alternative finance options, like crowdfunding and receivables financing, are ideal for startups, particularly those without an extensive credit history.

  3) What are the risks of using alternative finance?

  The main risks include higher costs, complex terms and the need to carefully research the provider that you choose to deal with. A business finance broker can assist with this understanding of the options and the marketplace.

  4) Can alternative business finance be used alongside traditional loans?

  Yes, many businesses use alternative finance to complement traditional loans, providing additional capital or more flexible repayment options.

  5) How quickly can I access funds through alternative finance?

  Depending on the option chosen, funds can often be accessed within days (or even hours in some cases), especially with online platforms like P2P lending or invoice financing.

  The Growing Importance of Alternative Business Finance

  In recent years, the shift towards alternative business finance has gained significant momentum. This trend reflects broader changes in the financial landscape, driven by technological advancements, evolving business needs, and changes in the global economy.

  Understanding these shifts is crucial for businesses looking to make informed decisions about their financial strategies.

  Why Businesses Are Turning to Alternative Finance

  Several key factors are driving the growing reliance on alternative finance:

  Changing Banking Environment

  The traditional banking sector has undergone considerable changes since the 2008 financial crisis. Increased regulatory requirements have made banks more cautious in their lending practices, particularly when it comes to SMEs. As a result, many businesses find it more challenging to meet the stringent criteria set by some banks, leading them to explore alternative sources of funding.

  Technological Advancements

  Technology has played a pivotal role in the rise of alternative finance. Online platforms (FinTech), big data analytics, and AI-driven credit assessments have made it easier for businesses to access finance without the need for lengthy bank applications. These advancements have also enabled lenders to offer more personalised financial products that better meet the needs of individual businesses.

  Evolving Business Models

  The rise of the gig economy, digital businesses, and startups with unconventional revenue models has created a demand for more flexible financing solutions. Traditional banks often struggle to assess the creditworthiness of such businesses due to their non-traditional revenue streams or lack of tangible assets as security. Alternative finance providers, on the other hand, are more equipped to cater to these new business models.

  Globalisation and Cross-Border Trade

  As businesses increasingly operate on a global scale, the need for financing that can accommodate international transactions and cross-border trade has grown. Traditional banks may not offer the flexibility required for international business operations. Alternative finance providers, particularly those specialising in trade finance or foreign currency loans, can offer solutions tailored to the needs of globally oriented businesses.

  Trends in Alternative Business Finance

  The alternative finance sector is constantly evolving, with several emerging trends shaping its future:

  Sustainable and Green Finance

  With growing awareness of environmental issues, there has been a rise in sustainable and green finance options. These are designed to fund environmentally friendly projects or businesses with strong sustainability credentials. Such options are becoming more popular as businesses seek to align their financial strategies with their corporate social responsibility goals.

  Increased Regulation and Oversight

  As the alternative finance sector grows, it is attracting greater attention from regulators. While this may lead to increased scrutiny and compliance requirements, it also provides a level of protection for businesses and investors, helping to build trust in these new financial products.

  Integration of Fintech and Traditional Finance

  The lines between alternative and traditional finance are beginning to blur, with more traditional financial institutions partnering with fintech companies. This collaboration is leading to the development of hybrid financial products that combine the best of both worlds. These can offer the innovation and flexibility of fintech with the stability and security of traditional finance.

  Rise of Data-Driven Decision Making

  The use of big data and AI in finance is transforming how creditworthiness is assessed and funding lines are granted. Alternative finance providers are increasingly relying on advanced algorithms to analyse vast amounts of data, enabling them to make quicker and more accurate lending decisions. This trend is expected to continue, making alternative finance even more accessible to a broader range of businesses.

  Considerations When Choosing Alternative Finance

  While alternative finance offers many benefits, businesses must carefully consider their options before proceeding. Here are a few key points to keep in mind:

  Cost vs. Benefit

  It’s important to weigh the costs of alternative finance against the potential benefits. While these products often offer greater flexibility and faster access to funds, they can also come with higher interest rates and fees. Businesses should ensure that the cost of finance aligns with their growth projections and can be managed within their cash flow projections.

  Impact on Cash Flow

  Some forms of alternative finance, like merchant cash advances, directly affect daily cash flow. Businesses need to consider how repayment structures will impact their operational finances and whether they can maintain smooth cash flow while servicing the debt.

  However, some forms of altfi can release more money than bank financing in many cases.

  Legal and Regulatory Considerations

  As with any financial product, it’s essential to understand the legal and regulatory implications of alternative finance. This includes ensuring compliance with relevant laws and regulations and understanding the potential risks if the business defaults on payments.

  Reputation and Credibility of the Lender

  The rise of alternative finance has brought many new players into the market. Businesses should conduct thorough due diligence to ensure they are working with reputable and credible lenders. Checking reviews, understanding the lender’s history, and seeking support from expert alternative finance brokers can help mitigate these risks.

  If FundInvoice can help you understand your options please contact us on 03330 113622 for support.

  The Future of Alternative Business Finance

  The future of alternative business finance looks promising, with continued growth and innovation expected in the coming years. As businesses increasingly look for flexible, fast, and accessible financial solutions, alternative finance is likely to become more and more available.

  The ongoing integration of technology and finance, along with the increasing adoption of sustainable practices, will further drive the evolution of this sector. For businesses, staying informed about these trends and understanding the full range of available financial options will be crucial to their success in choosing the right options. Once again using a sector-specific broker can help with that.

  Summary 

  Alternative business finance is not just a temporary solution; it’s a fundamental shift in how businesses can access the capital they need to grow and thrive. By embracing these new financing options, companies can unlock new opportunities for innovation, expansion, and success by leveraging alternative business finance options to support them.

  By Glenn Blackman