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Understanding Alternative Business Financing Options

Understanding Alternative Business Financing Options - Business Finance

With all major alternative financing products experiencing growth in the past few years – typically between 5 percent for the more unusual financing methods such as pension-led funding to more than 400 percent for hot new trends like crowdfunding – it’s time more businesses understood the many options available to them. Looking into alternative business loans can be the ideal solution for small businesses who do not meet the strict criteria imposed by major high street banks.

Types of Alternative Business Finance

While there are many different types of alternative business loans available, there are 4 main categories that proving to be favourites amongst SMEs in the UK:

  • Peer-to-Peer Lending

Funding is provided either by individuals or other businesses, and is primarily debt-based. P2P lending can be provided either by a single enterprise, or through multiple contributors.

  • Invoice Finance

A good option for businesses that require funds quickly – SMEs can ‘sell’ their unpaid invoices to lenders. They receive the payment while the client’s payment will be repaid to the lender.

  • Crowdfunding

Websites such as Kickstarter have given crowdfunding its moment in the spotlight. The concept is simple – individuals contribute small amounts towards a business’ ultimate financial goal.

  • Pension-Led Funding

Pension-led funding isn’t the most popular, but it is an option available to SMEs. It enables SME owners to temporarily dip into their pension funds to grow and develop their business.

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Why are Businesses Opting for Alternative Business Loans?

Quite simply, many businesses simply don’t want the hassle – or the rejection – that comes with applying for traditional business loans. Alternative business finance products like peer-to-peer lending are often much more straightforward and much more versatile than other products.

  • Strict Banking Criteria

According to research by the Nesta innovation charity, an estimated one third of businesses who have opted for alternative financing believe that they would not have been approved for a business loan had they chosen to go down the traditional banking route with high street banking establishments.

  • Quick Access to Funds

For modern businesses, timing is everything. SMEs need to be able to grab growth and development opportunities as they arise, and this means they can’t afford to wait around for business loans to be approved. Research suggests that the average invoice financing deal is closed in just 8 hours.

  • Flexible Options

Many business find that alternative business finance better suits their needs. While traditional banks have started to distance themselves from smaller lending, for example, as it is not in their best interests, products like P2P – where average lending in just over £5000 – is ideal for SMEs.

Go Alternative

Shocking statistics suggest that while 44 percent of SMEs in the UK have heard of alternative business financing, only 9 percent claimed to have used it. It’s time that more small businesses expanded their options and begin to look seriously at products such as peer-to-peer lending and invoice financing. To find an alternative business loan that’s right for you, compare business finance online using compareyourbusinesscosts’ easy-to-use online comparison tool.

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A Brief History of P2P

A Brief History of P2P - Business Finance

According to Nesta, the UK innovation charity, business peer-to-peer (P2P) lending grew by 250 percent between 2012 and 2014, demonstrating that this form of alternative lending is a growing trend amongst small to medium sized businesses who are looking for a reliable, affordable business loan without the hassles associated with traditional banking. Around one third of businesses who secure P2P funding believe that they would not be offered a loan from high street banks who impose much stricter criteria such as requiring a significant credit history or long standing accounting information – data that many newer businesses and start up companies are unable to provide. So just how did Peer to peer lending become such a hot topic within the financing industry?

P2P is often cited as being a hot new trend, but the concept of peer-to-peer lending is actually much older than you may think. Previously known as ‘quasi-banking’, meaning banking without the formal guidelines in place, the notion can be traced back to ancient Mesopotamia – the land surrounding modern day Iraq, Syria, and Iran. Of course, things were a little different back then and many of the transactions were seed-based – lenders would supply seeds and be repaid with crops from the harvest – but the basic fundamental aspects of modern P2P lending are clearly evident.

Consumer P2P lending really started to gain traction in the UK back in 2005, with the first commercial-based P2P lender, Funding Circle, being introduced in 2010. Since then, we’ve seen an influx of P2P and crowdfunding lenders who have been instrumental in changing the face of business finance across the country. Over the years, P2P has evolved to make it similar to traditional banking in terms of risk, which has made P2P a much more attractive option for small businesses – features such as insurance policies and provision funds for risk management are now included as standard.

Peer-to-peer lending is today a multi million Pound industry that’s helping many small businesses to grow and develop without needing to secure a traditional business loan. There are many advantages that businesses can enjoy by opting for P2P financing, including:

  • Profit Growth – 63 percent of businesses who secured P2P financing in the UK reported a significant improvement in profits, enabling them to grow their business.
  • Expanding Workforce – More than half of all businesses that have chosen P2P financing have been able to expand their workforce in order to develop and approach new markets.

If you’re interested in learning more about the advantages of P2P lending, compare business loans now with compareyourbusinesscosts’ handy online comparison tool.

Finance Playing a Key Role in Business Growth

Although business funding today is showing evidence of a long term rise, thanks in part to the greater availability of alternative financial products such as invoice financing, some small and medium enterprises are still shying away from business loans. In fact, not only are they shying away, but many are actually being particularly stubborn when it comes to their status as a ‘permanent non-borrower’. According to a report by research agency BDRC Continental, 1 in 4 SMEs would refuse business funding, even if it allowed them to grow their business in their desired direction.

Back at the height of the recession, these businesses would have been praised for their foresight, maturity, and competence. Today, however, they’re viewed as being largely irresponsible for failing to grab low-risk growth opportunities that would enable them to develop within an ever stabilising – and ever competitive – environment. Writing for the Independent, David Prosser notes that ‘businesses refusing to borrow for growth today risk being left behind by less risk-averse competitors’. He also believes that ‘many small businesses will come to regret their lack of ambition’.

How Can Business Loans Facilitate Growth?

Overall, a business loan helps by improving cash flow and increasing budget allocations for sectors that could be significant in terms of business growth, but how precisely could a loan help?

  • Open a New Location

Business loans can be used to secure a new premises, or transform an online-only business into a thriving brick-and-mortar store.

  • Expand Workforce

Expanding your workforce is the first step towards being able to take on more projects, more clients, and more demanding work.

  • Franchise Opportunities

Offering your business as a franchise opportunity is an excellent way of improving visibility and expanding out from the local area.

  • Product Licensing

If you make or design your own products, licensing them to enable other stores to sell your brand can help boost profits and reputation.

Business are actively being advised to grab growth opportunities as they arise, and this can sometimes mean taking out a small business loan. It’s understandable that some SMEs have been left nervous and uncertain by the lingering effects of the recession, which is why it’s important that businesses are aware of the many different options available to them. Today, commercial finance isn’t just about traditional bank loans – there are many more products, such as peer-to-peer lending, which is much more informal and carries less financial risk. To find a business loan that suits you, compare business finance online with’s online comparison tool.

Small Businesses Becoming More Amenable to Finance

A recent report by UK-based research company BDRC Continental shows that borrowing amongst SMEs is beginning to rise sharply, suggesting that more and more small businesses are becoming amenable to taking out business loans in order to fund their ongoing growth and development. According to the report, business funding for SMEs grew from just 18 percent in 2013 to 35 percent in 2014 – but just why are so many businesses starting to change their minds in terms of commercial finance?

With low borrowing figures during 2013, this suggests that with the recession was still fresh in everyone’s minds, SMEs were nervous about investing too heavily in expanding their services or promoting their business. At this time, almost half of all businesses claimed to be ‘permanent non-borrowers’, citing a wish to remain debt-free as the primary reason. Quite simply, SMEs were not prepared to enter into high interest contracts with banks that could ultimately lead them into severe financial difficulties in the future.

Jump forward to 2014, and with the economy continuing to recover and become stronger, SMEs were exhibiting a newfound confidence. Many began being more open to small business loans, and were spurred on by the growing range of alternative business funding options popping up. Commercial finance products such as invoice financing and asset-based financing were relatively low risk solutions for SMEs who weren’t particularly keen on venturing down the traditional banking route.

Key benefits of alternative business funding for small businesses include:

Overall, a business loan helps by improving cash flow and increasing budget allocations for sectors that could be significant in terms of business growth, but how precisely could a loan help?

arrow Lower interest rates, especially with peer-to-peer lending.
arrow Low risk options such an invoice financing that reduce financial dangers.
arrow More options, ranging from small, short term business loans to larger offerings.
arrow Faster access to finance to ensure growth opportunities can be taken.
arrow Higher approval rates, with options for SMEs with poor credit histories.
arrow More attractive deals based on repayment terms, rates, and borrowing period.

Are You Interested in Commercial Finance

If you’ve previously thought of yourself as a permanent non-borrower but are starting to become curious about how business funding could benefit your company, it’s well worth exploring some of the different options available to you. It takes just seconds to compare business finance offers from some of the UK’s most prominent lenders when using the online comparison tool by Simply tell us what you’re looking for, and we’ll find the best small business loans for you. Go on, give it a try!