Choosing The Best Form Of Alternative Finance For Your Business Situation [INFOGRAPHIC]

Carl Faulds

Businesspeople Working --- Image by © Helen King/CorbisIn the current climate, getting a small business loan is not easy. As a result, Britain’s alternative finance market has grown from £267 million to £1.74 billion in just two years, and could reach £4.4 billion in 2015. In a study funded by Nesta and the University of Cambridge, 86% of business owners who have used alternative finance would approach alternative funders first in the future, even if offered similar terms by a bank.

But many are still confused on the options available and which option is the best fit for their business circumstances. In the following infographic, we look at each of the options, when they are best utilised, and what they can be used for.

Alternative finance options

Angel investment

An angel investor provides financial backing for small start-ups or entrepreneurs. Angel investors are usually found among an entrepreneur’s family and friends. The capital they provide can be a one-time injection of seed money or ongoing support through difficult times.

Angel investment could help when you:

  • Need investment funding at an early stage or high-growth phase of business
  • Require a mentor to help grow your business
  • Don’t yet have a physical product or service, but can pitch your business plan
  • Are willing to give up a percentage of your treasured business to the investor

Angel investors tend to be somewhat risk-averse and will rarely make “followup” investments. You might find yourself wrestling with your financier over key company decisions and have less control over your company’s future.

Crowdfunding

Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people who believe in your offering, typically via the Internet.

Crowdfunding could help when you:

  • Need help in the early stages of your business to get off the ground
  • Are able to pre-sell a product or service to test the market
  • Are able to harness social media to mitigate risk via crowdfunder testimonials
  • Are unwilling to give up a percentage of equity in your business

Often more funding is required as crowdfunding is provided in smaller amounts than a comparative angel investor, from a number of investors.

Business loan

A business loan is when you are loaned a certain sum of money over a period of months or years. The interest rate and monthly payments are fixed over the term.

A quick business loan could help when you need:

  • A flexible and quick solution that can be repaid in convenient, fixed installments
  • A cash injection to:
  • buy new equipment
  • buy new machinery
  • buy company vehicles
  • fund a marketing campaign
  • fund seasonality fluctuations in trade

Business loans from alternative finance providers can be in your bank within 24 hours of applying even when your business is suffering with poor credit.

Peer-to-peer lending

Peer-to-peer is a form of funding when a number of ‘investors group together to lend you the money you need at an agreed interest rate. Usually this is arranged and put together through an online platform.

Peer-to-peer lending could help when you:

  • Need to fund a specific project
  • Have more time on your side – you can’t get money in your bank within 24 hours
  • Are not worried about flexibility – more people are involved and terms are rigid in terms of extending
  • Have been in business for at least 2 years

If you are suffering cash flow problems, peer-to-peer lending may incur higher interest rates.

Asset-based lending

Asset-based lending is a business loan that is secured by collateral (assets). If the loan is not repaid, then the asset can be taken.

Asset-based lending could help when you:

  • Can fund expansion based on your current assets
  • Need to grow your current business
  • Need to purchase new/additional property
  • Need finance for exporting or importing

Asset-based finance can help you in situations where you are struggling to gain business finance from your bank. Reputable lenders take a different view on longer-term asset-based finance and look past short term cash flow problems and consider overall business viability when lending.

Invoice finance

Invoice finance is a form of short-term borrowing to improve working capital and cash flow position. It allows a business to draw money against its sales invoices before the customer has actually paid.

Invoice finance could help when you need:

  • To counter balance the risk of non-payment by some of your debtors
  • To borrow more than a traditional overdraft would offer as a safety net to cover fluctuations in payment

Invoice finance can allow you to borrow up to 85% of your invoice value immediately, releasing the cash that you are awaiting to aid your every-day working capital.

Want more financial insight for today’s competitive business environment? See Why Hoarding Cash Is Bad For Business.


About Carl Faulds

Carl is a business recovery specialist. He started work in the Business Recovery profession in 1990 and has continued to pursue an ethos of working with distressed businesses to help them overcome their financial problems. As Managing Director of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business. Carl was former president of the Insolvency Practitioners Association, and makes regular appearances on BBC documentaries related to business recovery. Follow him on Twitter @CashSolv_Carl and @Cashsolv.