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Alternative sources of finance for small businesses

“How can I fund my business when my bank won't lend to me?” is a question we often hear from small businesses struggling to source funding from traditional sources and have even had their existing funding arrangements withdrawn or reduced with little or no notice.

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What is alternative finance?

Alternative finance is a catch-all term encompassing a range of emerging and lesser known lending options.

Research from Touch Financial has revealed that most small businesses aren't aware of alternative sources of finance. Not surprising when 80% of businesses whose applications were rejected by a bank said they were not given any information about alternative funding sources.

While another piece of research, from BDRC Continental, suggests that businesses are bypassing banks altogether, often funding themselves, though this may not be a sustainable long-term option.

Who is alternative finance suitable for?

There is no 'one size fits all' when it comes to alternative finance; each type tends to fill a specific need so it does appeal to a range of businesses. But even alternative lenders still want assurances you can pay back a loan, so you will need a business plan with projections and evidence that you’re carefully managing costs.

Here's a brief (but not exhaustive) list of finance that might be suitable to help you boost cash flow in the short-term or grow your business in the long-term.

Short-term sources of finance

Invoice finance and factoring

Invoice finance frees up the money tied up in unpaid invoices. An invoice finance provider will typically buy the debt from you for 90% of its value meaning you get the money in advance.

Factoring also allows you to sell your debt to another company. The factoring company pays you immediately and gets the money from your customer when it's due, though they will charge you a percentage fee. Although this an expensive form of funding, it can help to save you time.

Cash advances

Similar to invoice financing and factoring, there are a number of ways that you can tap into cash held up in your business including auctioning invoices for larger customers and getting advance access to cash tied up in card payments.

Trade credit

If you have a good relationship with your suppliers, and a record of prompt payment, you may be able to request an extended trade credit period in which to pay them, giving you a chance to pay for goods after you have made sales. This is particularly handy for fast growing businesses who struggle to fulfil large orders because of cash flow constraints.

Family and friends

In an Experian survey, 20% of businesses said that they relied on money from family or friends. Whilst this is a popular option, it isn't without its risks and should be approached with caution.

Treat it like any other business transaction and formalise the arrangement a legally binding agreement so that both parties knows what to expect from it.

Mid- to long-term sources of finance

Asset finance

If you need cash to acquire new machinery, asset or lease finance can help. This way, the lender owns the asset but your business benefits from using it a reduced rate.

You usually have the option of retain the asset at the end of the lease period for an agreed sum. This option helps to spread the cost of a purchase that might otherwise be prohibitive.

Crowdfunding

This is the latest trend in business funding and, as such, the least well known among businesses. Businesses can either try to attract funding through pitching on public sites like Crowdfunder or applying to join a lending marketplace where they can pitch online to a community of funders. Read more about crowdfunding »

Community Development Finance Initiatives (CDFIs)

Many funding sources are delivered on a regional or local level in areas of economic generation through CDFIs. There are more than 60 of these in the UK, providing loans and support to businesses with up to 249 employees who find it to difficult to access credit from commercial banks.

Grants

Grants may be fewer and further between these days, but some are still available for specific purposes. Find out more about different types of business grants available.

Government finance schemes

From start-up loans to money for established businesses with plans export or grow quickly, there are a number of government-backed schemes available for you to explore. See a list of the main government funding schemes for business.

Angel investment

An angel investor is someone who invests their own money in to a small business, often in exchange for shares.

Due to the involved nature of the financial arrangement, their input usually comes with some advice and mentoring as the ‘angel' is interested in seeing their investment become a success. This is a common source of finance for start ups and businesses focused on growth.

SME debt funds

Debt funds typically a pool of experienced investors who are seeking a good rate of return on their money will lend to small businesses that may otherwise struggle to get a bank loan.

This is not a solution for everyone; these funds are looking to make a profit and the rates reflect that. They will also want to see evidence that a loan can be repaid so it isn’t suitable for start ups.

Pension-led funding

Directors pool some or all of their personal pension funds into a pension scheme which then purchases or leases an asset from the business and holds it asset as security. The amount must be repaid to the pension scheme over a maximum five year period. There are strict guidelines as to how this funding can work and it must add demonstrable value to the pension fund.

To find out how the Forum can help you find the right funding for your business, call us on 0845 130 1722.

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