Alternative lending is big news in the small business sector. Over the last four years, bank lending to businesses has fallen by around 17% – with SMEs as one of the key drivers of growth this is doing the economy as a whole very few favours. So, what types of alternative lending are out there and how can they help small businesses?
This is often a good option for start up businesses. Originally it was used to help mostly social ventures and creative industries but this is branching out more into the mainstream of the small business sector. Debt finance crowdfunding is similar to peer to peer investment where startups can raise funds by accepting loans from investors – for example family and friends. Equity crowdfunding is a more modern development and involves receiving many different investments in return for small portions of equity.
Peer to Peer Lending
This is greatly helped by the internet, letting investors lend directly to SMEs. There is no financial institution acting as an intermediary, making peer to peer lending an alternative route to traditional loans – it is a faster type of loan transaction where lending rates are better than traditional bank ones. This is not used by start ups but is normally employed by SMEs wanting financial growth.
This is a type of asset based lending that allows businesses to raise capital by ‘selling’ their invoices to a factoring lender. This gives them access to up to 90% of the value of the invoice often within 24 hours. This means SMEs can avoid waiting for the payment terms enforced by large businesses which can strangle cash flow. Invoice finance is a good solution to late payment issues and this has greatly impacted on its popularity.
There is much more to learn about each of these forms of alternative finance so it’s worth shopping around to see which option presents the best options for your business.