WHAT ARE THE ALTERNATIVES TO HIGH STREET BUSINESS LENDERS?

by Nic Redfern , Director ,NerdWallet

 

High street banks have typically been the first port of call for businesses looking for credit, whether that’s in the form of an overdraft or a business loan. However, high street banks seem increasingly reluctant to lend to small and medium-sized enterprises (SMEs), and this, combined with the lengthy application process, can put businesses off from applying for funding.

Indeed, many businesses continue to be wary of using any kind of credit, even to expand and grow their operations.

But with the rising numbers of alternative lenders, businesses are seeing that high street banks are far from the only source of finance available. Many of these alternative lenders are specifically targeted at SMEs and offer various forms of finance to cater for different business needs, so they are becoming increasingly popular choices for businesses in need of funding.

Below, we highlight some of the alternative lenders for small businesses and discuss some of their advantages and disadvantages.

But before applying for a business loan from any lender, make sure you research your options as each lender will have different terms and payment structures.

 

Online challengers

Particularly in the aftermath of the financial crash, we have seen the emergence of new finance providers that are challenging the dominance of the big-name high street banks. These challenger banks and online lenders offer new opportunities to businesses looking for external finance- providing a faster application process than traditional banks and often being more prepared to lend to SMEs.

They can also offer smaller and more short-term loans, in contrast to high street banks which impose a minimum loan amount.

Online lenders use the latest fintech to make it easier for businesses to find a loan that meets their needs. However, even though online lenders may be more willing to take on risk and approve applicants with a less-than-perfect credit history, their loans may also come with higher interest rates to compensate for this.

 

Peer-to-peer lending

Peer-to-peer lending is sometimes described as an online marketplace. It matches people who want to invest and lend money with those who want to borrow, cutting out the middleman of the bank.

Like other online lenders, peer-to-peer platforms enable businesses to apply for and receive funds in a short space of time, although they will usually need to pay an arrangement fee for the service. Interest rates will vary between providers and will depend on the profile of your business, but it is possible to find favourable rates if your credit history is good.

 

Grants

Grants are one of the best funding options, simply because you don’t need to repay them.

However, because of this, the application process is often very lengthy and may include an interview. Grants can also have strict eligibility criteria, for example relating to location, industry, and age, and they may have restrictions on what the grant can be used for, such as equipment purchases, property refurbishment, and training.

Although competition for grants is high, there is a large number of national and local grants available for all types of businesses.

 

Angel investment

Angel investors are wealthy individuals, typically experienced and successful businesspeople, who invest in early-stage businesses.

Businesses can source and apply for angel investment in many ways, but the easiest way is likely to be through online platforms.

Rather than a typical loan with repayments, this arrangement would usually mean the investor takes a share of your business profits. So, business owners would have to weigh up this loss of shares with the benefits of receiving an immediate cash injection, as well as any guidance and contacts that the investor may bring.

 

Crowdfunding

If you have an exciting product or service to launch, you may want to try setting up a profile on a crowdfunding platform that people can then donate to. However, it can be hard for businesses to reach their target sum through crowdfunding as they need to build up enough interest in their proposition.

There are different types of crowdfunding platforms which arrange different forms of “repayment”. For example, businesses may repay their supporters, offer incentives/rewards to backers, or even offer shares in their company.

 

Invoice finance

For businesses that are already trading and have money tied up in unpaid invoices, invoice financing can help to release some cash flow.

Businesses receive a loan based on the value of unpaid invoices, with lenders usually paying them a set percentage of the invoice value. Depending on the exact arrangement, the lender may then own the invoice with the customer paying the full amount to them (invoice factoring), or the business will repay the lender (with fees) when the customer pays them (invoice discounting).

Businesses need to balance the advantages of releasing money to boost their immediate cash flow with the fact that they would lose a proportion of their invoice value. It could be a useful arrangement for sales businesses, that may need to pay for stock before they have received money from its sale for example.

 

Finding the right lending option

These are just some of the alternatives to high street lenders that businesses in need of funding can choose from, but there are many others available such as tax loans, merchant cash advance, and asset finance.

The lending option that is most appropriate for you will depend on the stage your business is at, why you need funding, and the borrowing timescale you want. Not every alternative lender will be the “easiest” or “best” option, so it’s worth shopping around the different lenders to find the best deal for your business. With so much to look at, you may find it useful to use a broker to help you make your decision.

 

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