What is Alternative Finance for Business?
Google ‘alternative business finance’, and you’ll be greeted with a plethora of adverts and articles promoting a wide range of different types of alternative business funding. But what exactly is alternative finance and how might it be useful for your organisation?
The alternative business finance market has developed over the last decade, since the 2008 credit crisis, as many organisations found it increasingly difficult to access funding via high street banks. The term ‘alternative finance’ has been coined simply to make the distinction from this traditional form of lending and it encompasses many, very different types of finance.
If your business is seeking funding, then these alternative channels provide additional options that may be more attractive than bank lending.
Alternative business finance target market
In general, providers of alternative business finance are targeting the SME market; businesses which will tend to have less than 250 employees and turnover somewhere south of £50m per annum. As these businesses make up around 99 per cent of all those operating in the UK, it is a very important sector for the finance industry.
What are the key types of alternative funding?
There are now so many variations in the alternative funding options available that an exhaustive list would be difficult to collate. Here are the main categories with a brief explanation of how they operate:
Peer-to-peer lending – a model, usually based online, that allows individuals and businesses to lend money to others seeking finance, in return for interest on the repayments.
Crowdfunding – here, in return for a cash injection to the business, investors either receive shares in the organisation (equity crowdfunding), or something else, such as a certain amount of the product, branded merchandise, being publicly named as a supporter, exclusive experiences or access to the business (reward crowdfunding).
Community Finance – either through special funds set up by banks, or by organisations created specifically to help local entrepreneurs, this business lending tends to be targeted at start-ups and micro-businesses.
Invoice Finance – there are several types of finance available against the value of a business’ invoices. The two main types of invoice finance are:
- Invoice Discounting, where the funder lends the business money against a certain percentage of their total unpaid invoice value. The borrower pays a pre-agreed fee for this service.
- Factoring, where the finance provider will also manage the collection of debts.
While these are often provided by traditional finance companies, there is a growing volume of crowd-based invoice finance available.
Asset Finance – by far the largest form of alternative business funding, but sometimes not included in lists concentrating more on crowd or community-based schemes. This type of alternative lending focuses on the funding of physical business assets, the asset itself providing the security on the borrowing.
UK asset finance companies provided investment worth over £33bn to businesses during 2018.
Which type of alternative finance is right for my business?
This is a big question, and will be determined by the individual circumstances of your business, for example:
- Business size
- Length of trading history
- Strength of order book and accounts
- Level of public / social interest in the type of business
- Credit status
It’s also important to recognise that some types of alternative finance (such as equity crowdfunding), mean that you will no longer be the sole ‘owner’ of your business and that you will have a long-term relationship with your investors.
The reason for the raising of finance can also play a key part in the decision-making process. If it’s to provide cash-flow for the general running of the business, or to fund a new project, then some form of alternative lending is likely to be most appropriate.
However, if the cash is required to purchase a specific item for the business then asset finance becomes an interesting option. There are two broad categories of asset finance; leasing, where the business pays for the use of the asset over a specified period; and purchase arrangements where the business intends to own the asset at the end of the agreement.
In fact, asset finance (or re-finance in this case) can even be used to raise cash against equity that exists in equipment that the business already owns.
Tell me more about asset finance
As with other types of alternative finance, asset finance can be more flexible and accessible than traditional lending provided by a bank. The business must still be credit-worthy, but finance providers will tend to assess each application on its commercial merits, rather than following a more regimented set of lending criteria.
Types of business asset eligible for asset finance
Finance is available on a very wide range of business assets which provides a lot of flexibility for businesses. This includes:
- Machinery and plant
- Commercial vehicles
- Materials handling equipment
- Medical equipment
Types of asset finance
As mentioned above, asset finance falls into two broad categories, but there are a range of finance solutions that sit within these. These include:
- Finance Leases
- Operating Leases (which includes Contract Hire)
- Hire Purchase
- Contract Purchase
The accounting, taxation and VAT treatment of each of these types of asset finance varies, and a decision on which is the most appropriate would depend on the individual case.
Get the right advice
The key to getting the right type of alternative finance for your business is to seek professional input before entering into any form of arrangement.
Maxxia has many years of experience in providing business finance to both the private and public sector. If you would like a no-obligation discussion about your funding requirements click here or call us on 020 7520 9450.