Alternative finance: 5 non-traditional routes for SME funding

SMEs often encounter obstacles when seeking traditional bank loans, facing a series of challenges that can quickly become overwhelming. Recognising this frustration, more entrepreneurs are turning to alternative finance options to drive their growth and achieve success. While traditional banking methods are familiar, they can often feel like a maze for SMEs. Fortunately, the realm of alternative finance offers a range innovative solutions tailored to the modern business landscape. With these options, SMEs can breathe a sigh of relief, knowing that securing funding no longer needs to be a source of stress. Alternative lenders have crafted solutions specifically designed to meet their needs. In this blog post, we'll explore alternative finance in depth, emphasizing the importance of comparing offers and presenting five unique ways to secure funding for your small business journey.

What is alternative finance?

Alternative finance refers to a diverse range of funding options available outside the conventional banking system, offering entrepreneurs flexible and accessible means of raising capital. Unlike traditional loans that heavily rely on credit scores, alternative finance takes a holistic approach, considering various aspects of a business to secure funding. This approach enables entrepreneurs to leverage different assets and metrics beyond just creditworthiness, facilitating access to capital even for businesses with limited credit history. Alternative finance solutions often utilize technology to streamline the application process, resulting in shorter turnaround times and increased accessibility for businesses of all sizes.

What do alternative lenders look at?

Alternative lenders assess loan applications by considering various factors beyond traditional credit scores and collateral. They examine the borrower's income (business owner) and cash flow, evaluating their ability to repay the loan based on financial documents like bank statements and tax returns. For small business loans, alternative lenders take a closer look at business performance metrics such as revenue, profitability, and growth potential. In some cases collateral may be required to secure the loan, making it easier to secure the loan as there is an asset that can be leveraged. Additionally, alternative lenders assess the borrower's industry and business plan, seeking assurance of the loan's viability and repayment likelihood. They may also review the borrower's debt-to-income ratio, payment history, and the purpose of the loan, tailoring terms to specific needs such as business expansion or equipment purchase. Personal and business assets may further bolster the borrower's application, offering additional security for the lender. In essence, alternative lenders adopt a holistic approach to evaluate loan applications, considering a diverse array of factors to make informed lending decisions.

Why is alternative finance better than a traditional bank loan for SMEs?

Benefits of alternative finance compared to traditional finance include:

1. Accessibility: alternative finance options are often more accessible, especially for businesses with limited credit history or unconventional financial profiles.

2. Speed: the application and approval processes for alternative finance are typically quicker, allowing businesses to secure funds more rapidly than through traditional channels.

3. Flexibility: alternative lenders may offer more flexible terms, repayment schedules, and customizable financial solutions tailored to the specific needs of borrowers.

4. Innovative products: alternative finance providers often introduce innovative financial products, such as crowdfunding, peer-to-peer lending, or revenue-based financing, providing businesses with diverse funding options.

5. Less stringent requirements: alternative lenders may have less stringent eligibility criteria, making it easier for businesses to qualify for loans, particularly if they lack strong credit histories or substantial collateral.

6. Personalised approaches: alternative finance providers may take a more personalized and holistic approach to evaluating loan applications, considering a broader range of factors beyond traditional metrics.

7. Technology integration: many alternative finance platforms leverage advanced technology, streamlining the application process and enhancing overall user experience for borrowers.

8. Industry specialisation: some alternative lenders specialize in specific industries, allowing them to better understand the unique needs and challenges of businesses within those sectors.

Why should you compare business finance offers?  

Before delving into the various alternative finance options available, it's essential to emphasize the importance of comparing offers. Each financing solution comes with its terms, rates, and repayment structures. By thoroughly evaluating multiple offers, entrepreneurs can make informed decisions that align with their business goals and financial capabilities. Moreover, comparing offers allows businesses to secure the most favourable terms, minimising costs and maximizing returns in the long run.

5 Alternative Ways to Secure Funding

1. Using purchase orders for financing

PO financing is a viable option for businesses that face cash flow challenges due to large orders or delayed payments. This alternative finance solution allows businesses to leverage their purchase orders as collateral to secure short-term funding from lenders. By advancing funds based on confirmed purchase orders, businesses can fulfil customer orders and seize growth opportunities without experiencing liquidity constraints. ‍

2. Leveraging unconventional assets for asset-backed finance

Asset-backed finance enables businesses to unlock capital by leveraging their assets as collateral. Unconventional assets such as intellectual property, specialized equipment, or even unique inventory can be used to secure asset-backed financing. By pledging these assets as security, businesses can access funds at favourable rates and terms, thereby fuelling expansion initiatives and strategic investments.  

3. Utilising unpaid invoices to secure funding

Invoices represent a valuable yet underutilised asset for many businesses. Invoice discounting, also known as accounts receivable financing, allows businesses to convert outstanding invoices into immediate cash flow. Instead of waiting for customers to settle invoices, businesses can sell their accounts receivable to lenders at a discounted rate, thereby accessing the funds they need to cover operational expenses or pursue growth opportunities.

4. Tapping into future card sales for a merchant cash advance

For businesses that rely on credit and debit card sales, a merchant cash advance offers a flexible financing solution. MCA providers offer upfront cash advances in exchange for a percentage of future credit card sales. Unlike traditional loans, merchant cash advances feature flexible repayment structures based on daily or weekly sales volumes. This alternative finance option is particularly appealing to businesses with fluctuating revenue streams or seasonal sales patterns.  

5. Utilising a credit facility or overdraft for cash flow flexibility

A credit facility or overdraft is a form of revolving credit that provides businesses with access to funds up to a predetermined limit. Unlike traditional term loans, credit facilities offer greater flexibility in terms of repayment and usage. Businesses can draw funds as needed to cover short-term expenses, manage cash flow fluctuations, or seize growth opportunities. By maintaining a credit facility or overdraft, businesses can safeguard against unforeseen expenses and maintain financial stability.

Alternative finance presents a wealth of opportunities for small businesses seeking funding outside the traditional banking system. By exploring innovative solutions such as PO financing, asset-backed finance, invoice financing, merchant cash advances, and credit facilities, entrepreneurs can unlock the capital they need to thrive in today's competitive landscape. Embracing the diversity of alternative finance options empowers businesses to overcome financial barriers and pursue their aspirations with confidence and resilience.