Alternative finance and what it’s offering small businesses

Alternative finance allows business owners to access capital via non-traditional sources. If your business is going through a growth phase, you'll need to raise investment to sustain further expansion. While the traditional route of securing a business loan from a high street bank appears, on paper, better suited to a small business, there is a lot of red tape.

Recently established businesses may struggle to demonstrate a trading history and the required cash flow forecasts. Hence, many SMEs will consider the alternative finance market to get growth capital while bypassing the burdensome restrictions imposed by high street banks.

Types of alternative finance in England and Wales 

Alternative finance is a catch-all term for almost any source of business funding other than traditional bank loans and overdrafts.

Asset finance

As a financial service, there are two key types of asset finance. One is funding secured against assets, known as asset refinance, which uses valuable balance sheet items in your business as security for a loan.

The other type of asset finance includes equipment leasing and hire purchase, specifically designed to fund new and used assets like machinery and vehicles.

Equipment leasing and hire purchase can cover almost anything, whether you need plant machinery, catering equipment, telecom systems, or a new van. Many lenders within alternative business funding specialise in a particular type of item.

Equity crowdfunding

Equity crowdfunding is when people —the crowd— invest in an early-stage private company (not listed on the stock market) in exchange for shares in that company. A shareholder holds partial ownership of a company and can profit if the company succeeds. 

Types of crowdfunding include donations-based crowdfunding, where people or companies invite the community to donate to a cause — often humanitarian. An example might be supporting refugees of war or a relief fund for a recent disaster.

There is also rewards-based crowdfunding, where the creators of a new product, service, or business target a group of small micro investors for capital in exchange for rewards. These rewards are often early delivery of the product or service in question or one-of-a-kind merchandise. 

Invoice financing

Invoice financing is a method of managing cash flow and realising value from outstanding liabilities. This is handy if you have large exceptional invoices, unpaid projects, or established clients.

The lender buys your unpaid invoices, so you have cash straight away. Once your customer pays the invoice, you get the remaining balance minus the lender's fee.

Invoice finance has a few related debtor finance techniques like factoring and confidential invoice discounting. Different products suit different business needs, but invoice financing is a practical way to manage cash flow if your business trades on credit and regularly invoices other companies.

Merchant cash advances

A merchant cash advance is a type of business financing suited to a small business that accepts debit and credit card payments from customers. The lender provides the company with a cash advance which it repays as a percentage of its customers' card payments using a card terminal. 

Online platforms

An online platform can be a reliable way to secure a business loan. Businesses like Funding Options enable business owners to access dozens of business leaders, from prominent names to small specialists, for the lowest interest rate. Online platforms are specialists in connecting business owners with tailored funding options. Potential lenders are ranked by likely suitability and an indication of cost and speed. A 7-hour turnaround is possible from the first enquiry to when the funds are available in the business account.

Peer-to-peer lending

P2P lending (or "P2P") allows people with investment money to provide business funding directly to business owners via a P2P platform. The lender earns a return from the principal issued through interest payments in return for assuming the risk of a payment default. Borrowers benefit from quick, flexible loans at competitive rates, typically used for working capital and cash flow.

A P2P platform will manage the process from start to finish, from credit score checking, matching of the lenders to investors and the collection of repayments. And finally the distribution of funds.

Property finance

If a business is looking to acquire a commercial property, it will need to compare the market for the best rates. Property development finance is a complex field, and there are many different alternative finance products available to help build a property portfolio. Finance includes commercial mortgages and auction finance. Have a read of our eight practical property development tips and our comprehensive guide on how to buy property at auction to get you started. Our expert articles cover how to get competitive quotes and how to budget for contingencies.

Term loans

The most common type of business loan is a term loan, known by various other names like unsecured loan, bridge loan, or cash flow loan. They all work the same way: the lender and business agree on a fixed amount, an interest rate, and a timeframe to pay it back—the term.

A term loan can take different shapes in alternative business funding; for example, some require security or personal guarantees, while others are based on credit rating or trading history. Once repaid, an amount borrowed under a term loan cannot be re-borrowed.