Paying wages, securing premises and equipment, freeing up capital and investing in growth are all factors which can pile on the pressure for SME owners. Traditionally the banks have been the go-to lender for SMEs however, the alternative finance industry’s set to be worth more than £10 billion by 2020 with more and more small business owners seeking finance outside the confines of traditional banking.
In the UK last year, a massive 50 per cent of start-ups had bank loans rejected however, despite this figure, 56 percent of SMEs are unfamiliar with any form of alternative finance.
So what is alternative finance and how can it help small businesses? Here’s a quick guide…
Investors are paired with businesses looking for loans in this online process. These loans can be unsecured or secured and have fixed payments like a standard loan.
Full financial records must be submitted and rates may be a little more expensive than the banks.
Merchant cash advance
This type of funding mirrors business performance and can only be used by companies that take credit or debit card payments as this is how the loan is directly repaid.
Up to one month’s business earnings are available with this type of finance. Although this is a very flexible loan it can be much more expensive than a high street loan.
These loans are based on the value of outstanding invoices to other companies. A percentage of the value is lent to businesses after the invoice is raised but before the debt is paid – this is usually up to 90 percent of the value.
This prevents businesses having to wait up to 120 days for their customers to settle the debt. A pre-agreed fee is paid to the lender.
If a business owner needs to buy equipment such as machinery, commercial vehicles or computers then they might consider using asset finance.
Asset finance breaks down the payment into manageable chunks so that there is no need to pay the full amount up front which could affect cash flow. It can be done in several ways, through leasing, hire purchase and contract hire.
This is money provided to start-up and growing businesses by private investors.
Typically, it presents a high risk for the investor, but it has the potential for above-average returns.
As an increasingly popular way of raising funds this ‘all or nothing’ platform attracts experienced and non-experienced investors who will pay for a percentage of the ownership of a company.
If the initial target for funds isn’t met, then investors will get their money back.
About the author
Philip Brennan is Head of Businesscomparison.com – a comparison website that helps business owners search for bank accounts, commercial mortgages and business energy and insurance. Philip is passionate about helping UK businesses save money and succeed.
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