Partner Article

Growing your business with alternative finance

When you want to borrow money for your business, the search for a provider can be both stressful and time consuming.

A few years ago, visiting your local bank to ask for a business loan or overdraft was the only option, but since 2008, small businesses have struggled with this traditional source of finance. Banks typically rely on a ‘one size fits all’ model, which does not suit many modern businesses.

Fortunately, businesses today have a new option: alternative lenders are becoming the go to choice for small businesses. These new providers are able to supply better terms, a simpler application process and quick decisions, creating an entirely new borrowing experience. The best providers are using their increased efficiency to offer their clients better rates and new products, exhibit greater flexibility when it comes to security and provide more transparent terms.

A recent report by the Cambridge Centre for Alternative Finance, and UK innovation foundation Nesta, showed that alternative finance platforms made up 12 per cent of the UK market for small business lending. Capgemini’s, Global Retail Banking report found customers had an overall positive experience with alternative lenders; significantly better than the experience they had with traditional banks.

Not all options and providers are created equal. Before making a decision you should consider the following questions:

How much do you need? How much can you afford? What assets will you be able to use as security? Will you be willing to take on personal responsibility for the amount borrowed or prefer to keep that liability within the business?

Answering these questions will give you a better scope of what you should be looking for. Once you have established your needs and what is available to your business, you’ll be in the best position to make a decision.

Here are a few of the most common options for businesses looking for alternative finance today:

Term Loans

Term loans are what many people think of when thinking of borrowing. You’ll be approved for an amount of money and receive the full amount into your bank account. The provider will provide a repayment schedule, which sets out when repayments against the balance are due (usually monthly), and how much interest will be collected from each repayment. Typically, business term loans are repaid over a period of between six months and five years.

In addition to the interest you pay on the amount borrowed, there may be fees to consider. For example most providers charge an arrangement fee (a one off administration fee, charged when you take out the loan). The amount will vary between providers, but is usually between 1 to 10 per cent of the amount borrowed. There may be other fees as well, so always read the terms and conditions to make sure that you don’t end up paying more than you expect.

A term loan can be a great way to finance a growth project or purchase. However, if your business has a consistent working capital need because of the gap between when you receive income versus that associated expenditure, the set repayment schedule of a term loan may actually make this problem worse.

Invoice Finance

If your business model means you supply goods or services before taking payment and issue invoices, financing invoices could be for you. Typically, a provider will advance 50-90% of the value of an invoice, and then pay the balance less interest and fees when your customer pays. This can be a simple way to get access to working capital when your business needs it, because you are just getting access to money that you are owed more quickly.

However, make sure you understand what all of the fees and charges involved will be, particularly if you decided to finance every invoice (often referred to as “factoring” or “whole-book”). Providers may suggest it’s one rate (for example “3% plus base rate”), but when all charges are taken into account, the actual cost may be greater than 20% of the financed amount when compared on an annual basis.

Overdrafts

Many are familiar with overdrafts from their personal bank accounts, but may not be aware that overdrafts are also a great way to fund working capital for their business. An overdraft is a line of credit, from which you can borrow and repay as needed, only paying interest on any outstanding balance. This gives your business the flexibility to borrow and pay back throughout the year when you need it instead of a fixed lump sum every month. Some providers may also charge fees.

Unfortunately, according to the Bank of England, bank lending to small businesses via overdrafts has shrunk by over £5 billion since 2011. Many businesses now find it nearly impossible to get approved for a new overdraft with their bank. This is why Growth Street created GrowthLine.

Many Growth Street customers have found it difficult to get finance even though they are profitable and growing steadily. One customer expressed a common concern well, saying: “We were just growing super-fast and we needed the cash to continue that momentum, we didn’t want to be constrained by not having the capital to keep going.” Too many businesses are held back from realising their full potential due to a lack of access to capital when they need it most.

Many businesses we speak with do not realise the variety of choices available when they start the search for finance. In fact, Enterprise Nation found that three out of five small businesses only speak with one provider when they decide to borrow money, and a further 48% were unlikely to continue their search if they are unsuccessful their first application. With Growth Street, companies are able to borrow money in a cost-efficient way that suits their business model, and quickly get access to much needed working capital.

Today, your business has many choices for finance, whether you need help maintaining cash flow throughout slower months in the year, or because you are planning on investing in growth. By using these tips, you will be able to find the best option available for your business.

This was posted in Bdaily's Members' News section by James Sherwin-Smith .