Good news! For businesses needing a cash injection to help support growth or provide working capital, there’s never been a wider choice of funding options available.
No longer are UK businesses limited to a business bank loan; there is now a large range of different types of alternative business funding options available. But what exactly is alternative business finance and how might it be useful for your organisation?
If you are seeking business funding, here’s some advice and information to help you understand your options. If you would like some expert help, our team of specialists is also available to source the right solution for you.
Why use alternative business funding?
Here are some of the benefits that these funding solutions for small businesses bring.
Fast Decisions: depending on the form of finance, you can often get a decision and payout very quickly
Lower Costs: as well as competitive interest rates, using funding structures such as those with a balloon payment can reduce monthly payments
Ease of Acceptance: funding secured on physical assets can help with credit approval, giving the finance company extra security
Versatility: it is possible to use different structures selected to suit the business, e.g. seasonal payments
Competitive Rates: with access to a broad range of funding providers, a finance broker can help you access the best rates
Refinance Options: if you have existing assets, either owned outright or with an existing finance agreement, you can leverage the equity to raise more cash
Personal Touch: unlike big banks, you are likely to develop a relationship with the alternative business funding provider who will be able to help with a range of services
Choice: while many banks only lend to existing customers, there is a range of funding alternatives, allowing you to shop around (or get a broker to do so on your behalf)
Trust: many UK business finance providers are regulated by the Financial Conduct Authority and as such have established rigorous processes and systems.
What is alternative finance?
The alternative business funding market has developed over the last decade, since the 2008 credit crisis, when many organisations, in particular small businesses, found it increasingly difficult to access funding via high street banks. The term ‘alternative funding’ 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 finance channels provide additional funding options that may be more attractive than bank lending and can be used for a wide range of purposes.
What are the key types of alternative business funding?
There are now many variations in the alternative business funding options available – below is a summary of the main categories with a brief explanation of how they operate. You can read about this in more detail here: Sources of Finance for Business
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 £35.7bn to businesses during 2019.
Examples of how the Maxxia Group has helped its customers
Which type of alternative funding 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 business funding (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.
Asset finance (or refinance in this case) can even be used to raise cash against the equity that exists in equipment that the business already owns.
Tell me more about asset finance
As with other types of alternative business funding, 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 is 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 forms 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 business funding is to seek professional input before entering into any form of arrangement.
The Maxxia Group has many years of experience in providing and sourcing business finance to companies of all sizes. If you would like a no-obligation discussion about your business funding requirements or a quote, simply fill in your contact details in the form below and someone will contact you very soon.