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If running a business were easy, everyone would do it, right? And it’s not only running it that’s tricky – you need to fund it and get it off the ground too. When it comes to funding, traditional bank loan routes aren’t right for everybody. Luckily, there’s plenty of alternative finance options out there for businesses to take advantage of.
Doing your research on your options is vital. Not every form of alternative business finance will be right for every business. Here are a few of the most popular options and how they work.
Crowdfunding and peer-to-peer lending
These two forms of alternative finance are quite similar, whilst actually being very different. Let me explain…
When it comes to Crowdfunding, there are two different strands. Reward-based crowdfunding is when lenders invest in a business and instead of repaying them in cash, the business offers them a reward of some kind. If the business is a hotel, for instance, the lender might be offered free or discounted stays. Peer-to-peer works in a different way, cutting out the middle-man and offering individual investors who are willing to lend their own money for an agreed interest rate. It’s arguably lower risk for investors and perfect for businesses who want to avoid the extensive financial checks from the bank and the high-interest rates. The downside is however that it’s not secured by any government guarantee and it does require a lot more time, effort and risk.
Invoice finance is when a third party agrees to buy a businesses unpaid invoices for a fee. This is ideal for businesses that rely on their invoices being paid on time, but are struggling to achieve this. Sounds simple, right? Yes, but there are a few different types of invoice financing.
Firstly, there’s invoice factoring. With this method, the invoice financier ‘buys’ the debt owed by the customer when the invoice is raised. They take a percentage of this debt as interest which is where they make their money. The remainder, usually around 85%, is then made available to the business owner upfront. This leaves the business with a steady cash-flow and the financier gets a cut of your sales.
Then there’s invoice trading. This is similar to factoring, however invoice trading uses online platforms to allow businesses to bypass traditional financiers and obtain finance from individual investors instead, similar to peer-to-peer lending.
Lastly, there’s invoice discounting. This is a good option if a business wants the fact that they’re borrowing money to stay confidential. With invoice discounting, the invoice financier wouldn’t manage your sales ledger or collect debts on your behalf, leaving you responsible for collecting debts and remaining the point of contact for your customers.
Merchant cash advance
This is a popular option for any business that makes the majority of their income through credit or debit card transactions, as opposed to by invoicing customers and receiving bank transfers. When a merchant cash advance is taken out, it is repaid through a business’s credit card transactions. A small proportion of this (typically 10-15%) is paid to the advance provider until the total amount borrowed has been repaid.
A business can usually borrow the equivalent of its average monthly turnover. If a business is in reasonably good health and receives most of its payments via a card terminal, there shouldn’t be too many problems obtaining this source of funding. The biggest draw with this finance is that there’s no need to worry about keeping a certain amount of money to one side to pay on a set date, as the repayments are proportional to turnover. With high approval rates, zero APR, no fixed term or hidden charges and no need to provide security or a business plan, MCAs are becoming very popular in managing cash-flow.
Unsecured Business Loans
Whereas a secured loan uses assets such as real estate or equipment to fall back on should things not work out, an unsecured loan is based purely upon the creditworthiness of the borrower. If a business doesn’t own many assets, is growing fast and needs finance quickly, and would prefer not to offer security, then an unsecured business loan could be the way to go.
We’re living in a digital world and as a result, many businesses have intangible assets which make offering collateral quite difficult. They’ve probably got a rented office, some computers and not an awful lot else. Traditional banks will use assets as security but with unsecured loans, lenders ask for a personal guarantee instead, usually from the company director, to cover their back. It’s a quick process with no valuations, although it’s important to remember that the overall cost is usually higher due to the lender’s heightened level of risk.
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