Bank lending? That’s so last century!

If you need help in expanding your business, there’s a growing number of alternative ways you can get the finance you need.

Indeed, the term ‘alternative finance’ has even been coined to describe a range of newly-emerging options which are finding their way into the mainstream.

Yet research has found that up to eight out of 10 businesses which were turned down for funding by a mainstream bank said they did not receive any information about where else they could turn for the finance they were seeking.

The financial crisis of 2007/8 completely transformed the landscape for SMEs, as high street banks and lenders which had been the mainstay of help options for firms at many different stages of their development suddenly developed an aversion to risk which meant many previously ‘safe’ customers were being looked on with new suspicion.

At the same time, interest rate cuts meant many entrepreneurs were forced to seek new ways of investing their money which could bring them the returns which had previously been available from ‘safe’ investments.

A couple of channels which became increasingly popular also happened to tap into the growing impetus towards self-employment and independent businesses – crowdfunding and peer-to-peer lending.

The official definition of crowdfunding is ‘the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet.’

The popularity of this form of lending comes from the ability of the internet to reach vast audiences of potential funders. Such funders can be easily put in touch with businesses seeking the means to expand or diversify, and can set the terms of their lending to potential clients themselves.

This then allows many smaller businesses to bypass the usual application processes laid down by mainstream banks, which often require high levels of security or guarantees from friends or family members which they might not be able to provide.

Crowdfunding generally harnesses the growing power of social media to achieve its fund-raising goals, with businesses or fledgling enterprises tapping into their networks of followers to raise money.

This is often done in return for specific non-financial incentives, such as written acknowledgements in the front of a book, regular news updates, tickets to a launch event and other such intangible returns.

Such social and philanthropic lending harks back to the time before the banking system as we know it existed, and judging by the number of websites now existing to bring together would-be entrepreneurs and people willing to act as business ‘angels’ is growing rapidly.

Of course, some crowdfunders work on the traditional basis of expecting some financial return for their investment. But because they are free to set their own terms for lending their money, they might not ask their borrowers to repay their investment until their business is able to.

Alternatively, if a start-up is willing to do so, an investor may ask to be repaid in equity, that is, a stake in the business in which they have invested. Returns they earn in this way may take some years to be realised, but can be paid on terms agreed between both parties, giving the beneficiary the chance to invest the money without the immediate pressure to pay it back.

Access to many forms of alternative finance may still be made subject to conditions such as the existence of an acceptable business plan, as well as evidence that the applicant can manage their cashflow and business costs.

Other forms of financing may be available to some businesses, chiefly including:

• -Invoice financing: This is a way of freeing up money tied up in unpaid invoices, in which a lender will typically advance funding up to a maximum proportion of the money outstanding on those bills.
• -Factoring: A business’s debt is sold on to another concern, which is then paid back when the original debt is settled, for example after 60 or 90 days under the borrower’s standard payment terms.
• -Cash advances: One way in which a business may free up cash is by selling on debt tied up in card payments which often take some time to be settled.
• -Trade credit: You may take the common step of opening an account facility with a regular supplier whereby you are granted an extended period of credit to pay for the goods supplied. This is especially helpful for businesses which have a rapid turnover of stock, or which wish to fulfil large orders received at short notice.

This isn’t an exhaustive list, but hopefully will give you some idea of avenues which you might explore for establishing and growing your business.