UK SMEs rely heavily on financing to address ongoing business development and expansion. Unfortunately, traditional financing has been harder to come by since the start of the financial crash a decade ago. This has given rise to a new stream of alternative financing solutions including peer-to-peer and revenue-based financing.
As an SME owner, you might be considering alternative financing to keep your business going. That is not necessarily a good or bad choice, and it all depends on your needs and resources. However, there are some important things to know before you apply. Alternative financing is still financing, and it should not be approached recklessly.
Assets and Credit History
Tighter credit restrictions are the biggest hurdle SMEs face in terms of traditional lending. Alternative financing options tend to be a bit more liberal in this regard. Having said that, your company’s credit history and current assets will still play a role in the amount of money you can borrow. That means the absolute first step is to do a complete analysis of assets and credit history. The results of that analysis will tell you what direction to move in for alternative financing.
Monthly, Annual Cash Flow
Inadequate cash flow is one of the primary drivers of SME financing. Understanding your company’s monthly and annual cash flow is important inasmuch as it partly determines the type of alternative financing most suitable to your requirements. For example, a seasonal business would be better off with a revenue-based product than a straight peer-to-peer loan.
You should note that cash flow does not necessarily equal profitability. Lenders will look at both when rendering a decision, but they may be more concerned about cash flow than actual profit. Cash flow is that which will enable your business to repay what is borrowed.
Efficiency Is Attractive
Next, one of the reasons alternative financing is attractive is its built-in efficiency – something we love at More Than Accountants. Anyway, a good number of financing platforms do everything online. Paperwork and endless face-to-face meetings with underwriters are eliminated this way. Even if your company could get traditional financing, the efficiency of alternative platforms might make one of them a lot more attractive.
Different Kinds of Financing
Understanding your company’s assets, credit history, and cash flow will tell you what kind of alternative financing to look for. That means you need to know what is out there. There are many different forms of alternative financing, the most common being:
- Peer-to-peer lending
- Investment and equity funding.
- Equity-based crowd funding
- Revenue-based loans
- Invoice financing
- Targeted loans from government agencies
- and more…
You can learn more about each of these different forms of financing by speaking to your More Than Accountants Business Growth Specialist. There is also plenty of information available through the financing platforms themselves, as well as news articles and blog posts detailing how they all work. Remember this: the more you know, the better position you will be in to find the kind of alternative financing that is best for your business.
Rates, Terms, and Fees
Lastly, alternative financing is not free from the three things that can make traditional borrowing a nightmare: rates, terms, and fees. Before you agree to any form of alternative financing, make sure you know the details. Thoroughly research every aspect of the financing. Make sure you know exactly what you are paying, why you’re paying it, and so on.
Alternative financing offers a lifeline to SMEs that otherwise struggle with traditional financing. Used the right way, they can be a financial resource that keeps a business going from one stage to the next.