Ten years on from the financial crisis that decimated many small and medium sized businesses, one change that continues to have an impact is a lack of access to business finance. Although there are sound reasons why the banks have tightened their lending criteria – nobody wants businesses borrowing money they can’t pay back – difficulties in accessing the finance businesses need to grow, or even get started in the first place, remain a very real problem.
Some studies have found that the main high-street banks turn down as many as 80% of the business lending applications they receive which is part of the reason why, more and more, alternative sources of finance are on the increase. Alternative lending encompasses a whole range of different options, each best suited to a particular set of circumstances.
Flexibility: peer-to-peer lending
Very often, small businesses are not looking to borrow large sums of money for long time periods – the market that banks are used to catering for. Indeed, industry studies show that there is significant demand for working capital credit from SMEs, with many looking to borrow less than £50,000 for just a few weeks at a time. If you’ve ever tried to take out a loan like this from a bank, you’ll probably know that it’s not a product they are generally interested in – they just can’t make money from it.
One alternative is online, peer-to-peer lenders. These companies allow individuals – and sometimes other businesses – to invest small sums which are used to make usually small, short-term finance loans. The most well-known player in this marketplace is Ratesetter, but there are many others. For the borrowing business, the advantage of this kind of finance is that it is quick to arrange – usually within a few days – and often comes with flexible terms, as well as far lower rates than high street banks.
The catch is that your business needs to have an established track record, and an excellent credit rating, as peer-to-peer lenders don’t want to put their investors capital at too much risk.
Crowdfunding: for start-ups and projects
Crowdfunding services – such as Kickstarter and IndieGoGo, amongst others – offer a chance to raise finance with a difference. You put your pitch on their website, explaining the exciting new product or service you’re going to create, and individual investors put in money to make your project happen. This kind of funding is ideal for start-ups, or existing businesses launching a new project, with innovative and inspiring products that will motivate people to invest. In most cases, you will be expected to offer your investors some kind of reward in exchange for their support. Perks for investors could include pre-release access to your product before it goes on general sale, or an ongoing discount on your new service.
Although this might seem like a great opportunity – and it can be – it’s important to remember that only a very small percentage of crowdfunding campaigns achieve their targets. And, you need to be as certain as possible that you will be able to deliver on what you promise, otherwise you will have lots of unhappy investors – and potentially their lawyers – banging at your door.
There are ultimately a multitude of different funding options available to small businesses, often offering more attractive interest rates and terms when compared with more traditional funding avenues such as the banks. Always explore your options to ensure your business is always getting the best deal available.