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Alternative Finance: A Guide for SMEs 

Estimated Read Time: 5 Minutes

Sean Owusu , 31 May, 2023

Small and medium-sized enterprises (SMEs) are vital for the economy, but they often face challenges when it comes to accessing finance. Traditional lenders such as banks may have strict criteria, high interest rates, long application processes and collateral requirements that make it difficult for SMEs to obtain funding. Fortunately, there are alternative finance options available that can help SMEs overcome these hurdles and grow their businesses. 

In this blog, we will explore some of the most common alternative finance options for SMEs, their benefits and drawbacks, and how they can help you achieve your business goals faster and easier. 

We will also provide some tips on how to choose the best alternative finance option for your business and how to apply for it successfully. 

Let’s get started! 

What is alternative finance? 

Alternative finance is any type of business finance that does not come from a mainstream provider like a bank. Whichever type of loan you go for, they fall into either of the following categories: 

Secured business loans  

These are loans that require some form of collateral from the borrower, such as property, equipment, inventory or invoices. Secured business loans can offer lower interest rates and longer repayment terms than unsecured loans, but they also carry more risk for the borrower in case of default.  

Unsecured business loans  

These are loans that do not require any collateral from the borrower. Unsecured business loans can offer more flexibility and convenience than secured loans, but they also tend to have higher interest rates and shorter repayment terms. 

Alternative financing providers can offer a variety of solutions that are designed to meet specific needs and preferences of SMEs. For example, some alternative finance options do not require security or credit checks, some offer flexible repayment terms and some are tailored to specific sectors or industries. Examples include: 

Equity funding 

This is where an equity investor provides funding in exchange for shares in your company. This can help you access large amounts of capital without taking on debt, but it also means giving up some control and ownership of your business. 

Microlending and peer-to-peer financing 

These are forms of lending that are funded by private individuals rather than a bank or credit union. They can offer lower interest rates, faster approval and more personalised service than traditional lenders. However, they may also have higher default rates and less regulation than banks. 

Bridge loans and equipment financing 

These are short-term loans that help you cover temporary cash flow gaps or purchase assets such as machinery, vehicles or technology. They can help you seize opportunities or overcome challenges quickly, but they may also have higher interest rates and fees than longer-term loans. 

How to choose the best alternative finance option for your SME  

Now that you know what alternative finance is and what types of options are available, you might be wondering how to choose the best one for your SME. After all, different options have different benefits and drawbacks, and what works for one business may not work for another. 

To help you make an informed decision, here are some factors to consider when comparing alternative finance options: 

How much do you need?  

The amount of funding you need will determine which options are suitable for you. For example, if you need a large amount of money to buy expensive equipment or expand your premises, you might want to consider equity funding or asset finance. If you need a small amount of money to cover a temporary cash flow gap or an unexpected expense, you might want to consider microlending, a bridge loan or a revenue based loan with simple top up options. 

How fast do you need it?  

The speed of getting funding will also affect your choice. Some options are faster than others when it comes to application and approval processes. If you can afford to wait for weeks or months, you might want to consider government start-up loans or crowdfunding that require more paperwork and due diligence.  

Alternatively, if you need money urgently due to an emergency or an opportunity, you might want to consider unsecured business loans or merchant cash advances that can be approved within hours or days. One way you can do so is by exploring business loans provided by Nucleus – With facilities integrating Open Banking and Open Accounting, as well as our automated underwriting system, we have streamlined processes that enable us to deliver rapid decisions and payouts. 

How risky is your business?  

The riskiness of your business will influence how likely you are to get approved and what interest rates and fees you will pay. Some options are more risk-averse than others when it comes to lending criteria and credit checks. For example, if your business is new, has a low credit score or operates in a volatile industry, you might find it hard to get a bank loan or an angel investment. You might have better chances with alternative lenders that consider other factors such as your revenue potential, customer base or social impact. 

How much control do you want?  

The level of control you want over your business will determine whether you prefer debt finance or equity finance. Debt finance means borrowing money that needs to be repaid with interest but does not affect your ownership or decision-making power over your business. Equity finance means selling shares in your business that gives investors a stake in your profits and losses as well as some say in how your business is run. Depending on your goals and vision for your business, you might prefer one over the other. 

By considering these factors carefully, along with the pros and cons of each option we discussed earlier, you can narrow down your choices and find the best alternative finance option for your SME. 

But before you apply for any type of funding, make sure you do some research on the lender or investor’s reputation, terms and conditions and customer reviews. You don’t want to end up with hidden fees, unfair clauses or poor service. 

And remember, always read the fine print before signing anything! 

How alternative finance can grow your business faster and easier 

 You might be wondering: how can alternative finance help you grow your business faster and easier than traditional finance? Well, there are several ways that alternative finance can give you a competitive edge and help you achieve your business goals. Here are some of them: 

Access to funding when you need it most 

Whether you need to seize an opportunity, overcome a challenge or scale up your operations, alternative finance can provide you with fast and flexible funding that suits your needs and circumstances. You don’t have to wait for weeks or months to get approved by a bank or an investor; you can get funded within hours or days by an alternative lender or a crowdfunding platform. 

Less hassle 

Alternative finance often comes with lower interest rates, fees and charges than traditional finance. This means you can keep more of your profits and reinvest them in your business. You also don’t have to worry about collateral, credit checks or complex paperwork; alternative finance is usually based on your revenue potential, customer base or social impact rather than your assets or credit history. 

Retain control and ownership of your business 

If you choose debt finance over equity finance, you don’t have to give up any shares in your business or answer to anyone else about how you run it. You can keep full control over your vision and strategy while benefiting from external funding. Even if you choose equity finance, you can negotiate the terms and conditions with your investors and choose who you want to partner with. 

Expand your network and reach new customers 

Alternative finance can expose your business to a wider audience of potential customers, partners and supporters. For example, crowdfunding platforms can help you raise awareness and generate buzz about your products or services while raising funds at the same time. You can also get valuable feedback and insights from your backers that can help you improve your offerings. Alternatively, equity investors can provide you with mentorship, advice and connections that can help you grow faster. 

As you can see, alternative finance offers many benefits for SMEs that want to grow faster and easier than ever before. With that said, alternative finance is not a magic bullet that will solve all your problems overnight. You still need to have a solid business plan, manage your finances wisely and deliver value to your customers. 

Once you are ready to take the leap and reach out to an alternative lender, why not check out what we have to offer at Nucleus? Across 3 products, we can provide you with a tailored solution from £3,000 to £5m. Whether you need finance for expansion, growth, buying stock and new equipment or even for working capital, we have a solution to suit your needs and can combine products tailored to your business. Get in touch with our team today! 

BY Sean Owusu




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