When making a purchase, be it property for commercial use or a new car, sourcing finance is usually the first port of call. Traditional institutions are the most commonly used, such as personal loans or mortgages from banks. However, many are turning to alternative finance, types of loans that are far removed from established institutions, being conducted between private individuals or lending entities.
But what exactly is alternative finance? In this article, we will answer this question, provide useful examples of alternative finance, and discuss their benefits. Let’s get started.
What is alternative finance?
Alternative finance is an umbrella term, referring to the wide range of finance options that fall outside of traditional institutions. Namely, they are alternatives to using banks and capital markets. Alternative finance tends to be much less regulated than these traditional options, which can be a double-edged sword. While this means you’ll likely have more options and an easier time obtaining a loan, it also means there is a higher level of risk. This can be mitigated with increased caution on the part of the borrower, and by using trustworthy hubs for alternative finance. Provided you are willing to do a bit more research than you would for traditional loans, alternative finance can be an excellent tool for sourcing capital.
Types of alternative finance
As we mentioned, alternative finance is an umbrella term, referring to a great many different types of finance. While they are all separate from any traditional institution, that is often the only similarity. Let’s explore a few examples of alternative finance, along with the advantages of using them and their applications.
Invoice financing
Invoice financing can be an excellent tool for companies with a tight cash flow and an immediate need for capital. This capital can be raised by leveraging a company’s invoices, effectively selling them to a collection company for a lump sum. This can relieve the cash flow bottleneck of late invoice payers, or simply allow a company to use its capital now rather than at the end of the month.
An added benefit is that the invoice collection company will chase the invoice on your behalf. This allows you to continue running the important aspects of your company, without the stress and tedium of badgering clients for payments. However, this can just as easily be a downside; as the invoice collection company will collect on your behalf, a lack of tact may reflect poorly on your company. This could lead to offending some clients, or spark some PR backlash. As such, you should take care when considering which invoice collection company to use.
Also Read: What Is Invoice Financing & How Does It Work?
Small business loans
While invoice financing is only viable for companies that have such a revenue model, small business loans allow anyone to access finance, provided they do not exceed certain limitations. To qualify, your business must not exceed a turnover of £6.5 million, while also employing fewer than 50 employees. If your business falls beneath these thresholds, you may be able to secure a versatile loan at fairly cheap interest rates.
Small business loans are also easier to apply for, as credit history and your business’s financial records are less important. Lenders know that your business is young, and so they don’t expect it to supply the same information that traditional finance would require. As such, small business loans can be a useful form of alternative finance.
Property financing
This form of alternative finance uses property as security for a loan. It is a category that refers to a variety of other loan types, with the most commonly used one being bridging finance. These types of loans can use a wide range of properties as security, from industrial warehouse units to residential dwellings and everything in between. Property financing can even be secured against a property the borrower intends to purchase. This makes it an excellent tool for property developers that aim to purchase a property with the intent to renovate, rebuild, or simply rent.
Asset financing
Asset financing is largely similar to property financing, with the obvious difference being the target of the loan. Rather than being used to purchase property, this form of finance can fund the purchase of company assets instead. Asset financing can be a good choice if your company needs a new printer or a suite of heavy machinery.
Quite like property financing, asset financing can be secured against the asset to be purchased. The loan and its terms would then be dependent on the value of these assets, making it vary greatly from company to company. However, this convenience does come at a higher risk; as the loan is secured against the purchased asset, it means that said asset can be seized if your company cannot repay the loan. Provided you manage this risk, it can be a very useful form of finance.
Crowdfunding
One of the more novel forms of alternative financing is crowdfunding. It is a method that has seen increasing use over recent years, where businesses with a unique concept turn to the public for financial support. If the public like the idea, they can quickly raise an enormous amount of capital for a business through many small investments or even donations. The business can then return this investment through a free instance of the product or service, equity in the business, a unique variation of the product or service, or many other ways.
While this might not sound like a reliable means of raising capital, it is a method that has more than proved itself. Many businesses have received their necessary capital through platforms such as Kickstarter, Indiegogo, and GoFundMe. Crowdfunding is more than a worthy alternative for businesses with unproven ideas that the ordinary lender is unlikely to support.
Conclusion
As you can see, there are many different types of alternative finance, and this is by no means an exhaustive list. Each form of alternative finance has its applications, and can be used to satisfy a different set of business needs. As such, it is vital that prospective borrowers carefully research their options and consider how they work with their current situation.