guest written by conrad ford [blog]
The business finance market has changed a lot in the last few years. It’s well known that after the financial crisis, high street banks reduced their lending to small and medium sized businesses, and alternative providers emerged to fill this lending gap.
A decade later, the business finance market is brimming with options for firms in a variety of situations — here are a few types of finance that could be useful in the current day.
revolving credit facilities
One of the biggest areas of change after the recession was bank overdrafts. Many businesses found that their overdrafts were reduced or removed entirely, because of global regulations designed to make financial institutions safer. As a result, we’ve seen many overdraft alternatives appear in the last few years, which are collectively known as revolving credit facilities.
Imagine a bank overdraft without the bank account — that’s essentially what a revolving credit facility is. You get a credit limit, which is the maximum that can be outstanding, and pay daily or weekly interest depending on what you’ve used.
Some providers offer credit facilities with a card included, and these products will feel quite similar to a business credit card in practice. However, having the option to either pay with a card or make a transfer from the same source might be handy, particularly if you want to pay suppliers as well as track expenses.
unsecured business loans
Unsecured business loans are another area where alternative lenders are leading the way, and it’s one of the biggest areas in alternative finance. The distinction between secured vs. unsecured lending is important, because the latter doesn’t require the business to own any physical assets — things like property, machinery, or vehicles.
Alternative lenders offer unsecured loans based on the financial position of the business overall, factoring in profits, turnover, other debts, and trading history. This means that if your business is strong enough, you can borrow a larger sum for growth without needing any assets.
To be eligible for an unsecured business loan, one of the most important (and commonly used) factors is a ratio of turnover to loan amount. In other words, lenders will be aiming to lend somewhere in the region of 10% – 30% of your annual turnover, and you’ll need to be profitable too.
It’s also quite common to be asked for a personal guarantee, which means you’ll be personally liable if your business can’t pay. This doesn’t mean your personal assets are the ‘security’ in a literal sense, but it does mean you should think carefully and talk to a lawyer before signing anything.
Perhaps the most famous area of alternative finance is peer-to-peer lending (P2P), but it’s also the most misunderstood. Peer to peer platforms connect individuals with businesses looking to borrow money — the idea is that both sides get a better deal than they would with a bank.
These platforms typically offer unsecured business loans with similar requirements as those outlined above, and some platforms specialise in a specific sector like commercial property.
The confusion comes from the word ‘investor’ — the individuals lending to the business are ‘investing’ in the sense that they’re aiming to make a return, but they’re usually not taking equity in the business.
If they were taking equity, this would be called equity crowdfunding rather than peer-to-peer lending. And the confusion goes deeper, because outside the business world crowdfunding also includes the early adopters market (“preorder now on our crowdfunding page”) as well as the donation and reward variation (“if we hit our fundraising target, all patrons get a free gift”).
In a nutshell, if you’re looking at unsecured business loans, some of the providers will be peer-to-peer lending platforms.
merchant cash advances
Merchant cash advances are all about card machines. Typically, the businesses using them are in the retail, hospitality and leisure sectors, and have irregular revenues and little in the way of assets. In the past, firms like these would have found it very difficult to get a loan — but merchant cash advances offer another route to funding.
They’re fundamentally based on card sales, and the lender works with your payments provider to access the data at the source. This means they can use the last few months of revenues to predict what’s on the horizon, and advance you cash on that basis.
Because they’re technically an ‘advance’ rather than a ‘loan’, the cost is fixed with a merchant cash advance. In other words, you don’t pay interest on an outstanding amount — but rather, you make repayments towards an agreed finish line. Most importantly, repayments are automatically taken as a percentage of card sales, which means the amount you pay back goes up and down with your daily takings.
This flexibility makes merchant cash advances an appealing option for any business that makes most of its revenue from card sales — but also means they tend to be fairly expensive.
These are just a few of the options available in the alternative business finance market. Whether you’re looking for something short-term to get you through a cashflow lull, or some long-term funding to fuel the growth of your business, the alternative finance market has a lot to offer businesses in a wide variety of situations.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions