Many businesses are struggling in the current economic climate, totally unaware aware of the huge variety of alternative forms of business finance that could be available to them.
More and more businesses simply believe and accept the fact that they:
• Are not eligible for finance (as they may have been turned down by a bank).
• Cannot get the finance they require.
How wrong businesses are!
Of course, since the 2008 global financial crisis, many traditional sources of business finance have indeed “shut up shop”. This is down to the strict capital holding requirements imposed on banks by Government and regulatory bodies, leading to more restrictive lending.
However this, coupled by the lowest interest rates we have ever experienced, has led to the emergence of a number of alternative forms of finance.
Many of these alternative forms of finance have arisen from the prevalence of disgruntled savers, usually high net worth individuals, not getting the returns they had previously enjoyed from their banks.
They have sought new ways of getting better returns on their money, and in doing so have created:
• A whole new breed of lenders.
• A whole new market for borrowing.
Don’t be fooled however, they do want a good return for their money. But if it is available then it should be used.
Generically this is known as peer-to-peer lending. But in simple terms it is formed of a group of people who have come together to lend money.
Financing businesses: The options
Here are a few of the various new facilities now available to SMEs for financing businesses:
1: Loan auction/online invoice auction sites
• A business wants to sell a single invoice to raise money to fulfill a large “one off” order. The business posts its invoice on a web site so that lenders can bid to give the highest advance at the best possible price.
• The advantage to a borrower is that it is not committing to a long-term agreement. It will know within an agreed period if it has managed to obtain the money it needs at an acceptable cost.
2: Spot/selective invoice finance
• In a similar way to the auction, this facility is generally for borrowers with regular single invoices or customers they want to raise money against.
• The difference is that this facility is pre-agreed by a single lender, at an agreed cost and advance against the invoice.
• The advantage of selective invoice finance is that it is simple, quick and often available with no long-term commitment.
3: Trade finance – purchase order finance /supply chain finance
• Enables businesses to fund the purchase of raw materials and goods to be sold. A true supply chain finance facility also includes the storage and delivery of products, and the financing of sales invoices once goods are delivered.
• This is a superb facility that enables companies, particularly inexperienced companies who are new to buying overseas to mitigate the risks of importing, exchange rate fluctuations and duty. Also for companies that simply don’t have enough money to fulfill orders.
4: Retail Finance
• Traditionally, retailers have had to rely on Banks to provide overdrafts for working capital requirements. Shops, like most businesses have peaks and troughs in cash requirements. These include rent and VAT quarters, tax payments and wages.
• Retailers can now raise money against historic credit card and debit card sales. This is then repaid by future credit and debit card payments from customers, with an agreed percentage of future sales being used to repay any loans.
5: Vendor finance (buy now, pay later)
• Although this type of finance has been around for many years, in this current climate very few of the larger lenders are making this facility available to smaller retailers.
• As a result a market has developed whereby alternative financiers buy loan agreements from certain types of businesses; enabling shops to offer customers the opportunity to spread the cost of certain larger, “considered” purchases.
6: Business angels: equity
• A traditional method of funding companies. The difference is that now companies do not have to be looking for investment of millions.
• Many investor networks have formed over the last 10 years, generally made up of high net worth individuals looking for opportunities to share their wealth and their expertise.
• By joining the right investor network, businesses can raise much smaller amounts of money, often as low as £25,000 from a number of investors.
• The investors, many of whom will have run or been involved in highly successful ventures, may also be in a position to advise or work with a company as part of their investment, offering useful advice and guidance to resource strapped businesses.
7: Wonga/ Borro
• These types of lenders are often described as “Sub Prime”, offering loans at very high rates of interest to companies that are unable to get funding from either the traditional or non-traditional sources.
• Borro is a modern day pawn broker, securing its lending against specific assets such as cars, jewellery etc.
• This type of finance should only be used in extreme circumstance, as interest rates will be punitive.
8: Invoice finance
• Is a highly recognised form of finance that has seen significant changes over the last 10 years.
Since the demise of the bank overdraft, invoice finance (factoring and invoice discounting) is now considered as the only viable alternative.
• Factoring companies are able to advance more money to small businesses because they have greater control over the collection of company invoices.
• Since the advent of numerous new invoice finance and factoring companies to the market, the criteria for lending to the SME Business Finance market has changed dramatically, in favour of the SMEs.
Financing businesses: In conclusion
In the sphere of alternative finance there are many options for SME or start-up businesses to consider when financing businesses. The first step is to look at their business model to see how they can best benefit from non-traditional bank lending.
Of course, I would always recommend they consult an independent business finance broker to get the best possible guidance in what can be a complicated and confusing arena.