How can SMEs leverage alternative finance?

It's never been more important for small businesses to have easy access to the right type of funding. COVID-19 has forced many SMEs to pivot and many have been forced to keep their doors closed until lockdown measures begin to lift from April.

How can SMEs leverage alternative finance?

It’s never been more important for small businesses to have easy access to the right type of funding. COVID-19 has forced many SMEs to pivot and many have been forced to keep their doors closed until lockdown measures begin to lift from April. However, for some businesses the situation over the last year has led to a significant increase in customer demand.

Whether you need a quick cash injection to ease the burden or business funding to meet an uptick in customer demand, alternative finance can help your business.

Traditional vs alternative finance

If you are struggling to obtain finance through your high street business bank, you may want to try an alternative funding (alt-fi) lender. It might even be worth bypassing traditional lenders altogether and opting straight for alternative finance. 

Traditional banks operate stricter lending criteria and it can be difficult for startups ‘ and those with a less-than-perfect credit history ‘ to get a look in. The application and approval process is also lengthier, putting business owners who need cash quickly at a disadvantage. 

Business loans from alternative lenders are generally more accessible, flexible and innovative, and there are a growing number of alt-fi lenders on the market today with a strong appetite for lending. Alternative finance comes in many different forms.

Let’s take a look at some of the most common types.

CBILS loans

Businesses have until 31 March 2021 to apply for a CBILS loan. To encourage lending, the Government makes a Business Interruption Payment to cover the first 12 months of interest payments, as well as lender-levied charges, so your clients won’t pay interest for the first 12 months. Those who have already received a CBILS loan might be eligible for a second. 

Up to £5 million per business is available through accredited CBILS lenders ‘ including high street banks and numerous alternative lenders. 

CBILS finance comes in four alt-fi types: business overdrafts, term loans, asset finance and invoice finance. Facilities under £250,000 don’t require a personal guarantee, however loans above £250,000 may require a guarantee at the lender’s discretion (although Principal Private Residences don’t apply).

Recovery Loans

The Recovery Loan Scheme is a follow-up to the existing COVID-19 loan scheme, ensuring that businesses can continue to access financial support as they recover and grow. The Recovery Loan Scheme is set to run from 6 April to 31 December 2021. 

Term loans and overdrafts of between £25,001 and £10 million per business are available, as are invoice finance and asset finance facilities of between £1,000 and £10 million per business. To provide lenders with confidence, the Government will guarantee 80% of the finance. Businesses will pay any interest and fees.

You can use the loan funds for any legitimate business purpose and there’s no turnover restriction for businesses accessing the scheme. Term loans and asset finance facilities are available for up to six years and overdrafts and invoice finance for up to three. As with CBILS loans, finance will only be available through accredited lenders. 

You’ll be able to access the Business Recovery Loan Scheme if you’ve taken out a CBILS, CLBILS or BBLS facility, and the maximum amount you can borrow will depend on the lender’s assessment and the scheme’s criteria. 

Unsecured business loan

Secured business loans require the borrower to back their finance with collateral such as property or equipment. The fact is, many SMEs these days work remotely or rent their workspace, while others simply don’t own expensive machinery or equipment. 

Fortunately, many unsecured business loans require zero security. The approval process is fast and depending on the lender, businesses could receive a decision within hours of submitting an application. The amount of money the lender is willing to provide will depend to a large extent on your business’ creditworthiness.

It’s important to bear in mind that unsecured loans often come with higher interest rates due to the higher level of risk to the lender. Some lenders will insist on you providing a personal guarantee, however there are lenders out there that don’t require them. 

Merchant cash advance

A merchant cash advance is a fairly new type of unsecured business finance. It’s designed to provide businesses with a quick cash injection that is loaned against future customer card sales. It’s very flexible in the sense that instead of fixed monthly repayments, the borrower pays back the money bit by bit through a percentage of their card sales. 

So, when the business is doing well, they pay back more ‘ and vice versa. 

Invoice finance

If your business requires a quick cash injection and you don’t take customer card payments, but do invoice your customers or clients, invoice finance could help to ease your cash flow problems. 

Ultimately, invoice finance allows you to receive payment for completed work faster. The lender advances the business a large percentage of the value of the invoice immediately. The finance amount minus the lender’s fee is credited to the business when the client pays the invoice. Invoice finance falls into three categories:

Invoice factoring – with this type of finance, the lender helps ensure that invoices are paid on time by providing credit control services. 

Invoice discounting – in a sense this is the simplest form of invoice finance because the business carries out its own credit control processes.

Selective invoice finance – a flexible form of invoice finance that enables businesses to identify which invoices they’d like to finance. 

Asset finance

Lack of funds for assets is one of the biggest barriers to growth. 

Many SMEs simply don’t have the capital to be able to purchase vital equipment or machinery outright, and others don’t just want to because they deem it too risky or don’t want to invest in something with a short shelf life. That’s where asset finance comes in. 

Hire purchase enables you to spread the cost of an asset and equipment leasing involves leasing the asset from the lender. When the lease expires, you have a few options: they can pay the rest to own it outright, upgrade it or return it to the lender.  

Business credit card

Business credit cards are suited to you if your business doesn’t require a lump sum upfront but you still want to spread costs while keeping track of your spending. When used responsibly, having a business credit card can simplify cash flow management and help to build up a positive credit score. 

As with personal credit cards, you agree to a set credit limit and are required to meet a minimum payment every month. Benefits include rewards such as air miles, cash back, travel insurance and reward points, and additional cards can be allotted to employees to provide them with access to the funds. 

Bridging finance

Bridging finance is often associated with property developers and investors, however it can be used by a range of business types and for a variety of purposes. The key is to have a clear exit strategy in place because this type of finance is designed as a short-term solution to get you from A to B. 

In the context of the property industry, a bridging loan can enable a developer to buy a property before they sell an existing one, or to fund renovations before a mortgage is secured. On the other hand, a startup taking part in an equity financing round that is due to complete in a few months may take out bridging finance to cover costs ‘  such as office rent and supplier payments ‘  in the interim. 

With so many business finance options out there, it can be difficult to know where to start. This article has been brought to you courtesy of Funding Options. Who have been chosen by the government-owned British Business Bank as a designated platform to find finance for businesses. We can compare over 120 lenders to find the right one for you, explain interest rates and fees, and help you navigate the application process.


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