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A Comprehensive Guide to Alternative Business Funding

Estimated Read Time: 5 Minutes

Pooja Jaiswal , 19 June, 2024

Have you been searching for the proper funding to take your business to the next level?

It’s no secret that finding the perfect financing option can be a real challenge, especially with traditional bank loans often falling short for small businesses.

The global alternative finance market, valued at a whopping £9,412 million in 2023, is set for impressive growth. Experts project it to reach £15,594 million by 2030, fueled by a robust Compound Annual Growth Rate (CAGR) of 7.4% from 2024 onwards.

What’s driving this surge? Businesses and individuals are increasingly turning to alternative finance options, moving beyond traditional banking and capital markets. This market’s steady upward trajectory reflects its resilience and adaptability in today’s evolving economic landscape.

Let’s explore how these options can benefit your business.

What is Alternative Business Funding?

In layman’s terms, Alternative Business Funding or alternative financing refers to the diverse funding options accessible outside conventional banking and traditional investors options. Since the Great Recession, it has become a viable source of finance for small business owners.

As technology advances in the finance sector, alternative funding leverages these innovations to connect potential borrowers with individual investors online, facilitating investors access to attractive investment opportunities that generate yields.

Types of Alternative Business Funding and Benefits

Here are a few common types of alternative business funding options listed below:

  1. Peer-to-peer lending
  2. Crowdfunding
  3. Invoice financing
  4. Asset finance
  5. Property finance
  6. Term loans

Peer-to-peer lending (P2P lending)

P2P lending allows businesses to connect to investors without any intervention by traditional banks through online P2P platforms like Capital Stackers and Loan Pad.

  • Benefits: Startups or SME businesses find P2P more appealing because of its simplified application process and potentially lower interest. In exchange for taking risk, lenders benefit from the return on principal generated by interest payments in exchange for taking the risk.

Crowdfunding

Another popular form of alternative business funding is Crowdfunding. It allows the “crowd” or a group to invest in an early-stage private company in exchange for equity shares in the company or rewards.

  • Benefits: With this funding, business owners can expand and market their company to potential investors. If the business succeeds, the investors will profit from their current partial ownership.

Invoice financing

In this type of alternative business funding, the businesses sell their unpaid invoices to a third party in exchange for quick fund availability. The third-party collects the payments on the invoices and returns the large portion upfront. Once your customer pays the invoice, you get the remaining balance minus the lender’s fee.

  • Benefits: This type of financing benefits businesses with a steady stream of invoices and requires quick access to funds, improving cash flow, and doesn’t create debt. Invoice financing benefits borrowers and lenders by providing a convenient and flexible way to manage cash flow and access capital. It offers predictable returns and allows for diversification.

Asset finance

There are two main types of asset financing: equipment leasing and asset financing.

Asset financing is when a company leverages its valuable balance sheet assets to secure a loan.

Asset financing encompasses equipment leasing and hire purchase, allowing businesses to acquire necessary equipment, such as machinery and vehicles, without purchasing them outright.

  • Benefits: Asset finance is a valuable funding solution for small and medium-sized businesses; it allows them to acquire necessary assets while preserving capital. It leverages existing assets as loan collateral, providing financial flexibility and facilitating upgrades.

Property finance

Property finance alternative business funding refers to non-traditional methods of financing commercial property acquisition, development, or investment. Businesses aiming to build their property portfolio and finance their commercial property activities effectively opt for these non-traditional financing alternatives.

  • Benefits: Property finance makes property opportunities possible. Compared to traditional loans, it offers a more straightforward and flexible way to obtain money, and you can pay it back according to your income. It also promotes creativity in real estate development and financial planning.

Alternative Funding Options vs Traditional Bank Loans

AspectAlternative Funding OptionsTraditional Bank Loans
DefinitionAlternative finance refers to the non-traditional method of financing and has been increasingly preferred by small and medium-sized enterprises for funding.Traditional lenders are banks, credit unions, and other mainstream institutions, which have long been the first preference of individuals and businesses for finance.
CriteriaThey are open to working with companies with varied risk profiles. Alternative lenders focus more on flexibility, faster approval processes, and tailored solutions.Banks require strong credit scores, established credit history, collateral, and proof of financial health, with criteria varying by institution.
FlexibilityIt offers flexibility in repayment terms approval processes and provides more flexible underwriting criteria and funding stages in the supply chain. Small businesses with weak credit can easily access it.Enterprises are expected to have a good credit history, consistent revenue, and valuable assets for security purposes.
AccessibilityIt is accessible to startups or SMEs with limited credit histories or unconventional income sources, providing opportunities traditional banks may not.Businesses with a solid credit history and stable finances are more likely to obtain traditional bank loans.
SpeedBusinesses can take advantage of time-sensitive opportunities with this funding option, which processes more quickly and provides quick access to funds.Approval and funding processes can be slower and more bureaucratic, potentially delaying access to funds.
Risk AppetiteIn contrast to traditional banks, alternative finance lenders are more likely to take on higher-risk projects or borrowers.Primarily focuses on lower-risk investments and is conservative in its approach to risk assessment.
Regulatory ComplianceThe models used by alternative funding operate differently from the rules governing traditional banking.Traditional bank loans strictly adhere to banking regulations and oversight, ensuring compliance with national and international standards.
Suitability ScenariosAlternative funding sources are ideal and much preferred for new businesses, high-risk endeavours, projects requiring immediate funding, and specialised industries.This is preferable for a well-established business with a strong credit history, conventional projects, and those prioritising stability and low-risk financing.

Traditional and alternative funding options have their fair share of advantages and disadvantages. Alternative funding options are more attractive and preferable for startups or small and medium-sized businesses with limited finance, limited operating histories, and high-risk projects offering accessibility that traditional banks often do not.

Evaluating the Best Option for Your Business:

Choosing the right funding option is crucial for the success and growth of any business. Whether deciding between traditional loans or alternative funding sources, careful consideration of several factors is essential.

Here is a list of points to consider while choosing the best option for your business:

  • Understand your business’s needs based on various financial requirements and dangers.
  • Evaluate the specific financial requirements (e.g., working capital, equipment purchase, expansion) and the amount of funding needed.
  • Examine and analyse the total expenses, interest rates, fees, equity stakes (if applicable), and impacts of traditional loans and alternative funding sources.
  • Recognise your level of risk tolerance and the amount and urgency of the money you require. Understand any collateral requirements or personal guarantees associated with traditional loans versus the flexibility offered by alternative funding options.
  • Evaluate how well the funding option aligns with your business model, growth strategy, and operational requirements.
  • Assess the flexibility of repayment terms, conditions for additional funding rounds, and any potential impact on cash flow.

Traditional loans offer stability but often require collateral and fixed terms. Alternate funding options such as Nucleus Business Loans and Revenue-Based Loans are more tailored and flexible to meet businesses’ specific needs.

One needs to understand the various needs of their businesses and the options available to make a well-informed decision that aligns with growth strategy, ensuring both financial health and operational flexibility.

What does Nucleus have to offer?

Nucleus offers a range of financing solutions designed to meet the diverse needs of businesses, such as follows:

Nucleus Business Loans

Nucleus Business Loans provide flexible, unsecured financing tailored for SMEs across various sectors like wholesalers, agriculture, construction, hospitality (hotels, pubs, restaurants), healthcare (care homes), and intellectual property firms.

They offer loans ranging from £5,000 to £2 million, with customisable terms ranging from three months to six years to suit cash flow needs. These loans support various purposes, including emergency repairs, debt consolidation, equipment upgrades, marketing campaigns, working capital, and inventory replenishment.

Nucleus Revenue-Based Loans

Nucleus Revenue-Based Loans offer flexible repayments based on monthly revenue, which is ideal for businesses with variable income. They offer loans ranging from £3,000 to £150,000. RBL supports growth and manages cash flow fluctuations, allowing borrowing up to 200% of monthly revenue. It will enable quick decisions, with same-day payouts, once accounting data is verified.

These loans also allow for top-ups as business conditions improve, ensuring borrowing remains manageable. Monthly repayments are fixed and predictable, aiding cash flow forecasting. This financing option is particularly beneficial for fast-growing businesses, as funding can increase alongside business expansion.

Bottom Line

In today’s dynamic market, choosing the right funding option can be challenging since numerous options are available. Making such a decision requires a proper understanding of your business’s aspects and unique requirements. If you are running a startup or small business that needs quick financial assistance, alternative finance might be just what you want.

Explore alternative finance options like Nucleus Business Loans and Revenue-Based Loans, designed to support SMEs across various sectors. These solutions provide the flexibility to navigate growth while managing cash flow effectively. With the global alternative finance market booming, now is the time to seize these opportunities for your business’s success.

Ready to take the next step? By applying now, evaluate your options, make informed decisions, and secure funding that aligns with your business goals with Nucleus.


BY Pooja Jaiswal

5 MIN

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