Traditional forms of lending from banks are declining when it comes to business funding.
A dramatic change in the ease of access to business funding occurred following the credit crunch in 2007. Ten years on, it’s still extremely difficult for many start-ups and early stage firms to access business loans the traditional way.
The government has recently forced the banks to tell borrowers about alternative lending options if they won’t dispense business loans themselves.
What kind of alternative funding for businesses is available?
There are several alternatives, all of which are growing more popular all the time.
In simple terms, they can be split into:
- Providers that use new information to lend based on the firm’s cashflow
- Crowdfunding online sources
- Providers that rely on the business to raise funds using existing assets.
Whichever alternative form of funding is used, the appeal lies primarily in the fact that they offer another way to obtain funding when traditional sources are cut off.
We drill down into alternative sources below.
About asset finance
This gives firms the opportunity to use some of their assets (things like printers or company cars) to gain access to loans, which are often a vital lifeline for the company’s future.
Terms depend on the lender in question, so it’s always vital to get enough information and advice to understand the specific terms of deals before signing up.
It may not be in the headlines in the way online crowdfunding is, but this low-key way of raising money when banks refuse to help is quietly popular and heavily used.
About invoice finance
This is more usually called ‘invoice discounting’ or ‘factoring’. It’s a way of raising money based on outstanding invoices owed by customers. It’s tapping into money that hasn’t yet come in through payments.
Sometimes it’s possible to access invoice finance online by auctioning outstanding invoices to the highest bidder. It’s a popular alternative funding source because it’s quick to access and can be invaluable if a business needs money urgently, either to sustain rapid growth or to sort out a crisis.
About cashflow finance
This covers a new kind of short term lender. They use data from online sales through ecommerce platforms or from credit card receipts to work out the firm’s expected cash flow and lend based on this projection. Repayments are based on the expected timescale of the company’s future cashflow. These loans are fast to access and growing in popularity as an alternative form of business finance when traditional sources dry up.
About peer-to-peer lending and crowdfunding
Most people have come across crowdfunding and online peer-to-peer lending sites. These are innovative and collaborative ways of raising business finance, based around groups of people investing or lending money via an online platform. In return lenders are offered some kind of reward, shares or equity. This form of raising business loans has exploded over the last few years, and shows no signs of fading from popularity.
It’s clear that in the face of banks failing to loan money to businesses, alternative forms of funding will continue to be accessed. It’s a sector that is likely to grow, utilising advances in technology and peer-to-peer access online.
The fact that lenders now have to inform firms they reject for funding of alternative sources is a positive step for start-ups and growing businesses. We hope it’s a sign of further help to come in this area.