What is alternative business finance?

3 Feb 2021

Alternative business funding is becoming increasingly popular with businesses across the UK. It’s a broad category that encompasses many different finance types, from asset finance to merchant cash advances. Read on to find out more about the features and benefits of this flexible form of funding for businesses.

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The extensive paperwork, strict requirements and security guarantees associated with traditional bank business loans make them inaccessible for many small businesses and SMEs. Fortunately, that’s where alternative finance comes in. 

Flexible finance options for businesses

Where high street banks are reducing the availability of business finance, alternative lenders are stepping in to provide business owners with more flexible and accessible options. Even businesses with a less-than-perfect credit history could be eligible for alternative finance.

Alternative finance products are designed to suit the needs of modern-day businesses. Although the word ‘alternative’ can suggest something that’s ‘different’ or even ‘unusual’, a growing number of businesses across a range of sectors are leveraging its benefits. 

Alternative funding can be used to boost short-term cash flow, hire new staff, invest in or refurbish premises, acquire new machinery or equipment, increase stock...the list goes on. 

The type of alternative finance you choose will depend on what you need the funds for, how much you need, how quickly you require it and how your business operates. 

For example, if you take card payments from customers and need to improve your cash flow, you may want to consider a merchant cash advance. On the other hand, if you invoice clients, invoice finance might be a more suitable option.

Let’s take a look at the 7 main types of alternative business finance on the market today.

1. Unsecured Business Loan

Traditional business loans often require the borrower to provide security in the form of an asset such as business premises or machinery. The problem is, many businesses simply don’t have assets and therefore don’t qualify. 

Unlike secured loans, unsecured loans don’t require any security. Fast, flexible and competitive by design, the approval process is fast and you could receive a decision in a matter of hours. 

Some lenders may require a personal guarantee from the company director, however other lenders provide unsecured finance without the need for a personal guarantee. 


2. Merchant Cash Advance

A merchant cash advance is a type of unsecured business finance. It’s a relatively new and innovative form of funding designed for businesses that accept customer card payments.  It works by you (the ‘merchant’) borrowing a sum of money from the lender then paying it back incrementally through customer card payments. 

The amount of finance the lender is willing to provide will depend to some extent on your average monthly card transaction turnover. 


3. Invoice Finance

Invoice finance is aimed at companies that receive payment by invoicing customers or clients. It’s often used to ease cash flow problems because it means you receive payment for completed work faster. 

It works by the lender advancing you the majority of the value of an invoice immediately. The final balance (minus the lender’s fee) is credited once the customer has paid the invoice. Invoice finance falls under three main categories:

Invoice factoring - the lender is more heavily involved and provides ‘credit control’ services to help ensure your customers pay on time.

Invoice discounting - in many ways this is the most straightforward type of invoice finance; you have to carry out your own credit control to ensure customers pay on time.

Selective invoice finance - with this type of invoice finance, you can choose which invoices you'd like to finance and handle the rest as normal.


4. Asset Finance

One of the biggest roadblocks SMEs face is when they lack the funds to purchase the equipment they need to run their business. 

Asset finance provides a financial solution by enabling businesses to spread the cost of a purchase (hire purchase) or lease the asset from the lender (equipment leasing). At the end of an equipment lease, you can extend the lease, pay the remaining amount to buy it outright, upgrade to a newer model or return the asset to the lender.

Asset refinancing is another type of asset finance. It enables you to access capital using the equity value of the assets on your balance sheet.


5. Business credit card

A business credit card (corporate credit card) works in a similar way to your personal credit card in the sense that you have an agreed limit (based on your creditworthiness) and are required to make a minimum payment each month. Benefits include:

  • the ability to spread costs and keep track of spending/expenses

  • the ability to get several cards, enabling designated employees to access the funds

  • the simplification of cash flow management

  • rewards such as air miles, cashback and reward points 


6. Bridging finance

If you’re in need of short-term business funding to tide you over while you wait for longer-term finance to become available, a bridging loan could work well. For example, a startup engaging in an equity financing round that is set to close in six months may decide to apply for bridging finance to cover costs, such as office rent, in the meantime. 

Bridging finance is also popular with landlords and investors. It enables the borrower to purchase a property before the sale goes through on their existing one. It can also be used to fund renovations or a new build project while the borrower waits to secure a mortgage. 

Closed bridge loans have a fixed repayment date. While open bridge loans have no fixed repayment date, you’ll usually be expected to pay it off within 12 months. 


7. Coronavirus Business Interruption Loan Scheme (CBILS) 

Until 31st March 2021, businesses were able to apply for a Government loan called the CBILS, Coronavirus Business Interruption Loan Scheme. The loan was designed to help businesses who were experiencing cash flow problems or disruption to trade due to the coronavirus pandemic.

Businesses were able to choose to receive the funds as a term loan, business overdraft, invoice finance or asset finance. To encourage lending, the UK Government created a Business Interruption Payment to cover the first 12 months of interest payments, as well as any lender-levied charges.

Funding Options has partnered with 40+ accredited lenders and processed more than £240M in CBILS loans for our customers during the time it was available. Our previous CBILS customers included a care home, electrical business and a wealth management firm

Although this funding is now not available, there are many other alternative funding options still available for businesses in the UK.

What are the main advantages of alternative funding?

Every type of finance has its advantages and disadvantages, and alternative business finance is no exception. Before making a commitment, make sure that you understand the terms and conditions of your loan, including interest rates and any fees. 

 Some of the benefits associated with alternative finance include:

  • Speed - The application process tends to be simple and doesn’t involve lots of paperwork. This is great news for businesses who need funding quickly. 

  • Lending appetite - While many traditional lenders are scaling back their lending, alternative providers have an appetite for lending and ready to fund businesses.

  • Flexibility - Many alternative lenders operate in a versatile way to cater to the needs of different businesses, as opposed to offering standard repayment structures.

  • Accessibility - There’s a variety of alternative finance options that can help if your business has experienced difficulty in the past, e.g. if you’ve received a CCJ.

How can I access alternative funding?

The good news is, there are alternative finance options out there for almost any UK-registered business - from startups and sole traders to scaleups and established SMEs. Even business owners with little or less-than-perfect credit histories are also considered.

Whatever your business finance needs entail, we’re here to help. The British Business Bank has chosen us to help businesses like yours find the right funding, as quickly as possible. Just let us know what you need finance for and we’ll compare over 120 lenders to match you with the best deals for your business. 

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Simon Cureton

Chief Executive Officer

Simon has been Chief Executive Officer at Funding Options since 2019, spearheading its transformation into a leading fintech with the launch of its Funding Cloud platform. Simon has over 27 years of experience in financial services, having held senior posts at some of the biggest players in the industry all over the world.

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