Funding a small business isn’t easy. You may find yourself in tricky situations where you’re in need of finance to get the ball rolling and the traditional bank loan routes won’t quite work for you. If that sounds familiar, there’s likely to be a perfect alternative form of finance out there for you and your business – it’s just a case of doing your research. Here are a few of the most popular options and how they work…
Crowdfunding & Peer-to-peer Lending :
Crowdfunding and peer-to-peer lending are often talked about in the same sentence. They’re both very innovative forms of alternative finance but equally, both are very different.
Crowdfunding usually works in one of two ways; reward-based crowdfunding or equity-based crowdfunding. Reward-based crowdfunding is unique in the sense that when lenders invest in your business, instead of re-paying them in cash you offer them a reward of some kind. For instance, if your business is a restaurant, you may offer a lifetime of free or discounted meals to your lenders.
With equity-based crowdfunding, entrepreneurs and very young companies offer shares in their businesses in exchange for an upfront investment loan. This is great if the business becomes successful, but if unsuccessful the shares are worth nothing and the business has nothing to repay, which is obviously a bad outcome for investors.
With peer-to-peer, it’s arguably lower risk for investors. It’s perfect for businesses that want to avoid extensive financial checks from the bank and high interest rates. Peer-to-peer cuts out the middle man, offering individual investors who are willing to lend their own money for an agreed interest rate. The downsides to this? It’s not secured by any government guarantee and it does require a lot more time, effort and risk than your bog-standard brick-and-mortar lending scenarios.
Invoice financing is a general term and is used when a third party agrees to buy a businesses unpaid invoices for a fee. It’s perfect for small businesses that need a steady cash flow and cannot rely on all their invoices being paid on time. Invoice finances can be a specialist independent company, part of a bank, or one or more individuals, similar to crowdsourcing.
There are a few different types of invoice financing. Firstly, there’s invoice factoring. With this method, when you raise an invoice, your invoice financier will ‘buy’ the debt owed by the customer. They take a percentage of this debt as interest, which is where they make their money. They make the remainder, usually around 85%, available to you upfront. This leaves you with a steady cash-flow and the financier gets a cut of your sales.
There’s also invoice trading. This is similar to factoring, however, invoice trading uses online platforms to allow businesses to bypass traditional financiers and obtain finance from individual investors instead, similar to peer-to-peer lending.
Lastly, invoice discounting. With this, the invoice financier would not manage your sales ledger or collect debts on your behalf. They would instead lend you money against your unpaid invoices for a pre-agreed fee. This leaves you responsible for collecting debts and you remain as the point of contact for your customers, which means the fact that you’re borrowing money can stay confidential.
Merchant Cash Advance:
A merchant cash advance – or MCA as it is otherwise known – is a form of finance based on a company’s credit or debit card transactions. If a business makes significant revenue from card payments via a terminal, as opposed to invoicing customers and receiving bank transfers, an MCA could be their ideal option.
You can usually borrow the equivalent of your average monthly turnover. If a business is in reasonably good health and receives most of its payments via a card terminal, there shouldn’t be too many problems obtaining this source of funding. Repayment comes through the business’s credit card transactions. An MCA involves the advance provider working alongside the terminal provider, with a small proportion of each card transaction – typically 10-15% – being paid to the advance provider until the total amount borrowed has been repaid.
With MCA’s, there’s no need to worry about keeping a certain amount of money to one side to pay on a set date. With high approval rates, zero APR, no fixed term or hidden charges and no need to provide security or a business plan, MCA’s are becoming very popular in managing cash-flow.
Unsecured Business Loans:
An unsecured business loan is essentially what the name suggests. Whereas a secured loan uses assets such as real estate or equipment to fall back on should things not work out, an unsecured loan is based purely upon the creditworthiness of the borrower. It’s a good option for businesses that don’t own many assets, who would prefer not to offer security and that is growing fast and need finance quickly, perhaps in order to increase their marketing budget.
In an ever growing digital world, more and more companies have intangible assets which makes offering collateral quite difficult. They may have a rented office, some computers, and not an awful lot else. This is where unsecured business loans prove to be very useful. Due to the lack of security, lenders will often ask for a personal guarantee, usually from the company director, to cover their back. It’s a quick process with no valuations, although it’s important to remember that the overall cost is usually higher, due to the lender’s heightened level of risk.
Want to know more about any of these alternative forms of finance? Choice Business Loans offer these and more and are very happy to help and answer any of your questions. Simply head to https://www.choicebusinessloans.co.uk/ and begin the process.
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