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Alternative business finance – your funding options

In Planning growth, Raising finance, Rapidly scaling - 3 months ago - 5 min

Alternative business finance – your funding options

Guest Author: Funding Options

It’s well known that small businesses often struggle to get finance. Ever since the financial crunch of 2008, banks are reluctant to lend to small businesses, but the finance market has changed a lot over the last few years. Many alternative lenders have emerged, offering a number of different funding options to small businesses.

There are many reasons why business owners may need finance – whether they want to prepare for peak season, smooth out cash flow gaps, or fund business growth. The most important aspect is to identify the most suitable type of finance for your individual situation. Let’s take a look at some of the options available and the key facts you need to consider when looking for business finance. In the below we consider debt options, if you are also interested in seeking equity finance check out G’s latest blogs here or get in touch via the details at the bottom of this page.

What you need to know before applying

If you’re considering alternative business finance, there are a few key facts you’ll need to bear in mind. Lenders will need to check your creditworthiness in order to assess how much your business could borrow. Almost every lender will want to check your business bank statements, annual turnover, profit margin, and your credit rating.

Having said that, most lenders will also want to see at least two years of trading history. If your business has been trading for a shorter period of time, there may still be some funding options available, but the choices will be somewhat limited and may come with a lower credit limit.

Before you apply for your preferred option, make sure you have an understanding of what funders will require, and the documents ready as this can significantly accelerate the due diligence process and increase your chances of success. If you’re prepared in advance and all goes well, the money could be in your bank account within only a few hours.

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Unsecured business loans

Unsecured business loans can be a good solution if your business doesn’t have any assets to secure finance against. As the title implies, this type of funding doesn’t require any collateral, because it’s usually backed up by the business’s trading position. The lender will assess how much you can borrow based on how your business has done in the recent past. You can usually borrow around 10-25% of your annual turnover if your business can demonstrate profitability.

However, since the lender will carry most of the risk, interest rates tend to be higher. Furthermore, you will probably have to give a personal guarantee, which means you’ll agree to pay the loan personally if your business can’t do so. Before agreeing to one, you should think carefully, and maybe seek legal advice before you sign anything.

Revolving credit facilities

Another option may be a revolving credit facility. This kind of funding is well-liked among business owners because of its flexibility. It works similarly to business overdrafts, and allows you to draw down funds whenever you need them. There may be no set-up fees, and you’ll only pay interest on the outstanding amount.

However, this flexibility comes at a price, so interest rates can be higher with this form of borrowing. But since interest isn’t running constantly, like it would with a regular business loan, it may still work out cheaper in practice. Revolving credit facilities are a rolling agreement between you and the lender which you can dip into when you need it, so they act as a convenient short-term buffer for those times when you need some extra working capital.

Merchant cash advances

If your business isn’t eligible for unsecured loans yet, but uses a card machine to process payments, a merchant cash advance could be a good option. It’s ideal for businesses with a high volume of card transactions every month like retail businesses and the leisure sector.

Essentially, you’ll get an advance, which means the total cost is agreed upfront. The amount you get is based on your monthly sales, and the amount you repay is a percentage of your future monthly sales. For this reason your repayments will go up and down with your overall takings. If your revenue is quite unpredictable, this can be really useful, because you don’t have a fixed amount you need to repay every month. You can see it as a finish line you’ll have to reach step by step.

Invoice finance

A lot of businesses have to wait for their customers to pay their invoices in order to get a new job started. If you’re one of those businesses, invoice finance could help you free up cash quicker.

You’ll be given an advance based on the value of unpaid invoices (usually about 85%), and as soon as your customers have settled their invoices, you’ll get the remaining amount minus the lender’s fees.

There are a few different kinds, but broadly speaking invoice finance can be a useful way to pay for the next project without having your cash flow restrained.

Peer-to-peer business loan

You may have heard of peer-to-peer lending, or crowdfunding, already. It’s technically a business loan, but instead of just one lender, the money comes from several private investors. This option is popular because in theory, investors and borrowers get a better experience than going with their bank — it’s a win-win situation.

On the other hand, this funding option tends to have quite a rigorous eligibility process to protect investors. This means that sometimes less glamorous businesses can struggle to appeal to potential investors — and smaller or newer businesses may do better to look elsewhere.

Peer to peer lending is often confused with equity crowdfunding — the former is borrowing, while the latter is selling shares in your business — but equity crowdfunding could also be worth checking out if you’re looking for long-term working capital and don’t mind selling equity in your firm. Find out more about crowdfunding in G’s guest blogs written by Crowdcube, the UK’s biggest crowdfunding platform.

An example in real life 

Indie Brands is an independent distributor of premium spirits, working with the UK’s leading restaurants, bars, retailers, and hotels. Founder and Managing Director Doug Cunningham was looking for finance to boost business growth, because the funding they had in place simply wasn’t sufficient. Despite being profitable ever since inception, the bank couldn’t help.

To embrace this potential for growth, Doug approached Funding Options, who found him a peer-to-peer loan for his fast-growing company. With this funding, Indie Brands was able to hire more members of staff and acquire additional stock.

Final thoughts

There are many different funding options out there, but with so many options, the alternative business finance market can seem quite overwhelming sometimes. If you need help finding the right type of finance for your business, and assessing the merits of each option, G by Grant Thornton and Funding Options can help you with your search.

Get some free guidance from one of our team team today on 08081 722350 or drop us an email: G.Enquiries@uk.gt.com

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