Alternative lending: Which product is right for you?

There are nearly as many financial products as there are business needs. When I travel around the UK I often get asked by business owners what funding is right for them. Below are some of the most common types of funding people are curious about along with their advantages and disadvantages.

Online Lenders

You need funding approved quickly to respond to a new opportunity, like an unexpected but lucrative customer order. Arranging traditional financing can take too much time and you might lose out opportunities to other competitors.

With the introduction of technological advances in the finance sector, alternative providers are able to respond faster to client needs with tailored finance solutions. They digitise the application process, making it more straightforward and less time-consuming, and introduce more sophisticated assessment algorithms that can better evaluate your business.

Online lending is not a single type of loan, but rather an entire category of financial products facilitated through technological platforms. They can come in many forms, but their common traits are ease of access through all types of devices and quick response rates.

Advantages:

• The application process is online, which means approval can take as little as 1-2 days
• Approval isn’t based on credit history only, but can incorporate much more data to better evaluate your business

Disadvantages:

• In most cases the amount of capital provided is smaller than traditional loans, which isn’t suitable for large scale business ventures like purchasing property
• If your business loan is secured and you face difficulties in making the repayments, you could lose the asset

Invoice Finance

You have several large invoices outstanding. As a result, you’re struggling to meet your own financial obligations.

If a business has funds tied up in unpaid invoices, invoice financing can resolve this problem. The lender purchases the value of the outstanding payments, which can be a timely cash flow solution. Businesses can also take advantage of this method when they need funding for their own commitments, such as repaying a supplier or securing payroll.

Advantages:

• Funding doesn’t require security through any additional collateral
• Addresses cash flow problems which would otherwise stunt business growth

Disadvantages:

• This product is appropriate if you rely on commercial invoicing over other types of payment methods
• Costs and rates could prove higher than a more traditional method, such as an overdraft

Crowdfunding

Your business is at the start-up phase and you would like to raise funds to introduce a new product or service.

Crowdfunding platforms can give you access to people interested in investing directly in a great product or service. This way businesses can collect capital from a large number of individuals. In return, investors will receive agreed rewards and/or active involvement in product development.

Advantages:

• This strategy can create a customer base that is actively engaged with the business and has a strong personal connection to your brand
• Rather than giving up ownership of the business or repay traditional loans, you can build a strategy where you offer specified rewards in exchange for financial support

Disadvantages:

• These campaigns take time and need careful preparation
• With some platforms, if you don’t reach your fundraising goal, you won’t have access to any capital until you achieve the initial set target

These are just a few examples of available alternative finance options and it’s important to take into consideration their pros and cons when looking for new financing. This, in combination with knowing your business and having a solid understanding of its performance, will be the formula for success and growth.

Amy Roberts is Senior Business Development Manager, Spotcap UK