There’s more to alternative finance than crowdfunding

Crowdfunding isn't all that alternative finance has to offer, writes Funding Options CEO, Conrad Ford.

Crowdfunding has been around for a while now, and the concept is familiar to most of us. It’s a wide category too, with charity fundraising, Kickstarter campaigns, and peer-to-peer lending all falling under the umbrella of crowdfunding.

Part of the reason for the huge rise in crowdfunding’s popularity is the democratic aspect — it connects a business venture or charitable project with a ‘crowd’ of individuals, who decide whether or not to put money into the idea. For peer-to-peer lending specifically, the attraction is that both lenders and the business get a better rate by sidestepping the banks — and the whole process is faster to boot.

The trouble is, the popularity of crowdfunding and peer-to-peer overshadows many other types of business funding, which could be just as useful to your business depending on what you’re looking to achieve. Let’s take a look at some other forms of alternative finance that might deserve the same attention as crowdfunding.

Revolving credit facilities

Revolving credit facilities fall into two main categories. The first category contains alternatives to traditional bank overdrafts, where you have a credit limit agreed in advance and can use the funding as and when you need to. Usually you’ll only pay interest on what you use, and many of these products include online portals for control and visibility of your account.

The other category is unsecured loans with a top-up option, triggered once a percentage of the total amount has been repaid — effectively making it another type of revolving credit facility.

This area of the alternative finance market is important since the major banks stated reducing and removing overdrafts for small businesses, and represents an increasingly popular form of cash flow finance. Often, the credit decisions are automated too, making some of these facilities lightning-fast to set up.

Merchant cash advances

Merchant cash advances are one of the most innovative forms of alternative finance, aimed at helping the retail, hospitality, and leisure sectors. Many of the businesses in this sector don’t have much in the way of assets to back up a loan, and they often have unpredictable cash flows too — a recipe for a ‘no’ from a major bank. To solve this problem, merchant cash advances use their one ‘asset’ — card terminal sales — as the basis for a revenue loan.

The finance provider works with the business and their payments provider to quickly look at the last few months’ sales, and then the loan amount is based on those figures. The repayments are calculated as a percentage of monthly takings, which means you pay back more in a good month and less in a slow one — and perhaps best of all, because they’re taken directly at the point of sale, these repayments can feel painless compared to other ways of repaying a loan.

Invoice finance

If you don’t have a card terminal but you do issue invoices, the alternative finance market offers a range of invoice finance too. This is a traditional product offered by the banks that has been reinvigorated by alternative providers, and there’s lots of different types available.

Invoice finance is based on the invoice amounts on your sales ledger, and some facilities allow you to choose specific invoices or customers to finance while leaving the rest of the book alone. The various subcategories offer various benefits, but overall, invoice finance allows you to speed up your payment cycle without affecting your customers’ terms. Lots of alternative invoice finance providers offer elegant online platforms too, so you can upload an invoice as soon as you raise it to get finance within hours.

Pension led funding

Pension led funding deserves a mention because it’s a highly innovative (if not widely appealing) type of alternative finance. It’s aimed at business owners who have built up a personal pension — the pension loans money to the business, and the business makes repayments into the pension with interest.

In this way, you can use personal assets for business growth, and both sides will benefit if things go well. PLF also represents an alternative to using personal assets such as a residential property to get a business loan, which are often involved indirectly via personal guarantees.

Final thoughts

It’s clear that there are many other areas of innovation in alternative finance besides crowdfunding. Although crowdfunding and peer-to-peer are great things for many businesses — and it’s heartening to see them gaining widespread acceptance as legitimate alternatives to bank finance — let’s hope some of the other innovative products out there get the same recognition soon.

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. 

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

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