Alternative finance – find the best option for you

Alternative finance is the name given to new ways of accessing finance outside of traditional methods such as banks. Since its emergence after the financial crash in 2008, the growth of the industry has been rapid. According to Bank of England data on business finance, in 2018 the combined net lending (the total amount lent out, minus the amount collected in repayments) to small businesses of the UK banks was £518m, whereas net lending through Funding Circle alone was £723m.

This is a continuation of a downward trend in net lending from banks since the Brexit vote, raising concerns about a return to the low levels of bank finance available after the financial crisis.

Fortunately, alternative finance providers have made great strides to fill this hole, gaining a large and diverse mix of investors to fulfil the demand for business finance. To help you get familiar with what’s available, here’s our quick overview of some key business finance options.

Crowdfunding

With crowdfunding, instead of getting your finance from just one provider (like a bank) you get lots of small amounts from a number of different individuals (the crowd). This is usually done through online platforms such as Kickstarter. Here businesses pitch for funding and investors can pick the ideas they want to back. There are two main types of crowdfunding:

Equity crowdfunding – here businesses give up some equity in exchange for the investment. Equity crowdfunding provides startups and new business with capital to get off the ground, while others use it so they’re not tied to repayments. If you don’t want to give up a stake in your business, this won’t be for you.

Donation & rewards based crowdfunding – people invest because they believe in the project, rather than for financial gain. It could be a pure donation or with a reward, such as use of the new product when it’s completed. Often better suited to arts or charities, or if you’re developing an innovative new product.

Peer-to-peer or direct lending

Suitable for more established businesses, peer-to-peer lending also involves connecting businesses with large numbers of individuals. The difference here is that the business borrows the money from all those investors, which they then repay with interest. For the business it works in a similar way to traditional business loans. The key benefit is that by doing it online the experience is usually faster and more efficient.

A wide range of investors to make more capital available

To help make the investor base more robust and able to withstand future economic shocks, some platforms such as Funding Circle allow a wide range of investors, big and small, to lend. Larger investors include local government, the British Business Bank* and financial institutions such as pension funds. They lend to businesses alongside the thousands of individual investors that lend through the platform. A diverse mix of investors means more capital is available to lend to businesses looking to borrow, while still retaining a fast, efficient service.

Invoice financing

Invoice financing allows you to access the value in your unpaid invoices. If you have invoices on a 3 or 6 month payment term, you can access that money straightaway. You effectively sell the invoice to the finance provider, then repay them when the client pays up. Invoice financing is a helpful option if you need short term help with your cash flow. It can also help if you’ve landed a new contract but need the capital to fulfil it straightaway.

Considering alternative finance?

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*In November 2018 the British Business Bank committed up to £150m for lending to UK small businesses through Funding Circle. The transaction, under the Bank’s ENABLE Funding programme, is designed to accelerate lending to small businesses and is expected to support the growth of more than 2,000 UK firms. For more information visit fundingcircle.com/businesses.