Alternative Finance: A Guide for SMEs 

Alternative finance refers to the options available for financing a business beyond traditional loans. These are often more accessible and flexible than a bank loan. This can be split into two categories:

Secured Business Loans

To begin with, secured loans involve the borrower offering something valuable as a guarantee in case the loan cannot be repaid.

These are common advantages and disadvantages associated with secured loans:

Advantages:

• Tend to have a lower interest rate
• Give generally more time to pay back
• May let you borrow more

Disadvantages:

• You are risking your asset loss in case of inability to pay it back
• The application process can take longer and could be more complex
• You need to have something that has some value to use as security

Unsecured Business Loans

On the flip side, unsecured loans are such loans where you are not required to offer any security for that particular loan. The lender lends directly to you based on your creditworthiness or business performance.

The benefits of unsecured loans are as follows:

• Faster and easier to organise
• You aren’t at risk of losing identified assets
• A good option when you haven’t got substantial assets to tie up into security

Disadvantages of Unsecured Loans:

• Do tend to be higher interest rate
• Are usually for shorter terms
• The amount you can borrow is often less than that of a secured loan

These options meet different business needs. Some do not require a credit check and thus are helpful for new companies or those with poor credit standing. Others allow flexibility to repay little in months when the cash flow is low and more in months when the business seems lucrative. Some cater to unique needs, even regarding industry type, knowing very well the challenges and cash flow peculiarities of those industries.

Common Alternative Finance Options

Now, let’s explore some of the more popular alternative finances:

Equity Funding

Equity funding means you sell shares in your company for access to money. This can be done by finding angel investors, utilising venture capital, or even crowdfunding.

Pros:

• Access to large amounts of money
• No repayment required
• Investors may bring experience and contacts

Cons:

• You will have to give up some ownership and possibly some control of your company
• Future profits will be shared with investors
• It can take a while to approve

Microlending and Peer-to-Peer Financing

These loans typically come from regular people willing to contribute, not banks. Websites help connect these people with businesses that need money.

Advantages:

• Often easier and quicker to get than bank loans
• May offer lower interest rates for some borrowers
• Can be more flexible in their lending criteria

Disadvantages:

• Interest rates can be high for riskier borrowers
• Loan amounts are generally smaller than those of traditional bank loans
• Less regulated than traditional banking, which can heighten risks

Bridge Loans and Equipment Financing

Bridge loans are short-term loans that help businesses when short on cash.

Pros:

• Access to money sooner
• It can allow you to capitalise on key opportunities that won’t wait
• Equipment financing allows you to make otherwise expensive equipment more affordable

Cons:

• Tend to be more costly than longer-term loans
• Bridging loans must often be repaid within a limited time
• Equipment finance is only for certain purchases

How to Select the Best Alternative Finance Option for Your SME

The best alternative finance option is subjective and will vary based on what you want for your business. Here’s what you really want to know:

How much cash do you need?

Each option is best for different funding sizes: For larger amounts, equity funding might be in order. For smaller amounts, a microloan might suit you best.

How soon do you need the cash?

Some options, such as bridge loans, are able to provide funds at extremely fast rates. Others, such as equity funding, can take far longer to arrange.

What’s your risk level?

Lenders view any number of businesses as being much more risky than others. New businesses, businesses within volatile industries, and businesses with poor credit history may most assuredly discover that different options are far more available to them than the others.

How much control would you like to have over your business?

Some options, like equity funding, require you to give away some control, while loans can allow you to retain full control.

What can you afford to repay?

Consider your cash flow carefully. Only take out a loan where you can afford to make the repayments likely.

Do your research ahead of time and select an option. Always check the lender’s reputation and any available customer reviews. Look very carefully at all the terms and conditions, which will help you understand all of the costs involved – not just the interest rate. Watch out for any hidden fees or charges.

How Alternative Finance Can Help Your Business Grow

Speed of Access to Money

Most alternative options will give you faster access to the money you need compared to most high-street banks. In fact, this speed is critical often when an opportunity presents itself or when a pressing problem needs to be resolved as fast as possible.

Less Hassle

Alternative finance often features less paperwork and not so many strict requirements compared to traditional bank loans.  Some options do not require credit checks or collateral, which proves very helpful for new businesses or companies with less-than-perfect credit histories.

Keep Control of Your Business

By providing so many alternative options in finance, you do not have to yield shares within your business. This offers you a chance to have full control of your company in terms of direction and decision-making while still enjoying the required funding.

Expand Your Network

Some types of alternative funding, like crowdfunding or money from individual investors, highly depend on you finding new customers and business partners. These methods might also give you useful feedback about your products or services, which can help you improve what you offer.

Tailored Solutions

Many alternative finance providers have products specifically geared to target specific industries or types of businesses. This means they should better understand your business challenges and thus be in a strong position to provide more appropriate terms.

If you’re in need of alternative finance, check out Nucleus – We offer loans ranging from £3k up to £500k and embrace modern technology to make speedy decisions and facilitate speedy access to finance. Apply for a loan today to take your business to new heights!