Alternative lending rises in popularity

Alternative business finance opportunities, such as grants and crowdfunding, are on the rise in the UKBusiness growth tops the objectives list for most start-up businesses, but lack of working capital can often be the main barrier, so funding options have to be considered. Whilst many business owners will still turn to the bank as their first port of call for finance, recent research shows that the plethora of alternative lending sources now available are gaining in popularity – with 51 per cent of UK SMEs having considered or used alternative finance providers – according to a survey conducted by Amicus Finance in the first quarter of 2016. This is up 9 per cent on the same period of 2015.

This will be largely due to the frustrations business owners experience when pursuing traditional lending sources. Another survey from the same finance firm highlighted that 16 per cent of 400 business owners surveyed had been turned down by a mainstream lender – and 31 per cent said their inability to secure finance via a traditional route had directly led to to them missing out on a deal or investment opportunity. It’s hardly surprising that alternative finance is growing in popularity.

SMEs are expected to grow investment by 2.3 per cent over the next year, so alternative funding sources will likely continue to grow. Some of the investment areas cited by business owners included IT equipment (39%), cars (18%), telecoms (13%), plant and machinery (12%) and commercial vehicles (11%).

So with an evolving finance landscape, alternative lending sources are an attractive option. However, whilst they may not be subject to the same rigours and legislation as that around bank lending, the proposal still must be strong to be considered. Most alternative lenders will still want to see a robust business plan incorporating a vision of where the business is headed. A strong proposal is vital – and details of any company assets will be key in aiding a funding request.

So, what are the alternative funding options? They include:

Crowdfunding and peer-to-peer lending – these funding sources are similar and involve lenders competing online to invest in start-ups and small businesses, based on unsecured loans and short-term risk. This has become hugely popular in recent years but it is advisable to seek professional advice on the area.

Business Angels – these are what we recognise as ‘Dragons’ aka Peter Jones – successful individuals with capital available to make private investment opportunities. They can inject cash into a business but importantly, also offer advice and experience that can be invaluable for business growth.

Accelerator programmes – these are government-backed or private programmes for ‘young’ businesses that are destined for high growth.

Grants – these aren’t widely available and are usually specific to areas/regions or sectors that have identified a need for a particular offering that will help the development of that region or sector.

Invoice finance – this is a way to unlock cash that the business doesn’t yet have as it is owed in. Invoice finance providers lend the cash to the business up front and then collect the monies owed on the invoices, taking a small fee. This is invoice factoring, but there is also the option of ‘discounting’ – where the business handles the correspondence itself.

In most alternative finance sourcing cases, it is wise to work alongside a trusted business adviser or an accountant, as they will be able to help with business plans, forecasting, preparation of management accounts and any other necessary criteria that will most likely need to be met regardless of lending type.