Taking out a bank loan has historically been the way businesses secure a cash injection when they need it, but bank loans can be tricky to get for some small businesses, and they’re not always the most suitable option. Luckily, there is a growing number of alternative funding options that businesses can use to access the money they need to grow and develop.
In this blog, we’re going to look at some of the bank loan alternatives you might be interested in, giving you all the information you need to make an informed decision about how best to fund your next business venture.
What is Alternative Funding?
Firstly, let’s begin by pinning down exactly what is meant by the term ‘alternative funding’, or ‘alternative business funding’. In short, alternative funding relates to any capital you acquire outside of a traditional bank loan. Businesses that have been refused a bank loan, have a poor credit rating, or simply can’t find a bank loan that is suitable for their needs commonly use alternative funding methods. That being said, there are multiple options available and some of the information can seem vague, so it’s important you do your research and work with a trusted lender, especially if you choose to go down the online route.
Types of Alternative Business Funding to Traditional Bank Loans
As mentioned, there are a few different types of alternative funding available, but like any credit agreement, it’s not something to be entered into lightly. With this in mind, it’s imperative that you make the right choice. To help you, here are some of the most common types of alternative funding you might come across.
1. Asset finance
Asset finance is a good type of alternative funding if you have lots of assets that you can use as collateral against a loan. With this type of funding, a lender will provide you with finance, using equipment, machinery, and sometimes software as a safety net should you default on your payments. With this in mind, the type of assets you have and the value of them are what determines how much you can borrow.
Asset finance is a good option for SMEs who want to expand their business without impacting their cash flow. It also means you can access capital from items you already own in order to buy new ones. Keep in mind that your assets are held against the loan until you pay it off, so make sure you can pay off what you borrow to avoid losing items.
2. Unsecured business loans
An unsecured business loan is a good option if you don’t have any assets or property to secure a loan against, or if you don’t want to use assets as collateral. You can use an unsecured business loan for almost anything business related, be it to improve cash flow, pay unexpected bills, consolidate existing debts, or to invest in assets to help your business grow. Because they require no assets (although a director may have to sign as a personal guarantor), they are ideal for newer businesses that don’t have assets.
It’s important to note that due to the higher risk to the lender as a result of no collateral being secured against the loan, the interest rates for unsecured loans are higher than other types of alternative funding.
3. Peer to peer lending
Also known as social lending, peer to peer lending is essentially a type of alternative business funding where like-minded people who share your vision or passion lend you money. You can usually find these types of lenders online through specialist platforms, but like applying for a grant, they require you to put together a comprehensive pitch, and the market is competitive. On top of this, peer to peer lending tends to work more in favour of established businesses rather than new ones.
4. Secured business loans
Secured business loans work in the same way as unsecured business loans, except they require you to put up assets as collateral in order to secure the loan. You can use a secured business loan for anything business related, with the amount you’re able to borrow being factored in alongside the value of your assets. Due to the collateral required, secured business loans are mostly used by more established businesses, but newer ones can also take one out provided they own equipment or property to secure the loan against.
Secured business loans tend to have lower interest rates than their unsecured counterparts because the risk to the lender is reduced via collateral, making them more affordable long-term.
Short-Term Alternative Funding Business Finance
The above four alternative business funding options are mostly used for long-term lending and big business plans, but if you a quick cash boost to help with day to day business tasks, consider looking at one of the below business financing options:
If you allow your clients to pay via extended payment terms, you may find that you have a gap in your cash flow between doing the work and getting the money for it. This can cause issues in paying suppliers or buying more supplies to start work with a new client. Through invoice financing, a lender will pay you up to 90% of your outstanding invoice total, and you pay them back (with interest) when your client pays you.
Merchant cash advance
Does your business operate seasonally or have quiet periods? If so, a merchant cash advance could be a good option for you. You agree a borrowed amount and interest rate with a lender, and you pay it back as a percentage of every card transaction you take. The more sales you make, the more you pay back, and the fewer sales you make, the less you pay back.
Revolving credit facility
Business expenses can be unexpected and unpredictable. The worst case scenario is that you need money quickly but don’t have the capital or don’t have time to wait for a credit application for financial support to be approved. Revolving credit can prevent this from happening. It’s essentially an overdraft for your business. You can dip into it as and when you need to without having to apply for credit every time, making it a good safety blanket solution, and you only ever pay back what you owe (plus an agreed interest rate).
Alternative Business Funding at Aurora Capital
At Aurora Capital, we work with a number of different lenders offering credit to businesses who don’t want or aren’t eligible for a bank business loan. As well as the above three short term options, we also work with lenders providing secured loans, unsecured loans, and bridging loans, as well as other types of cash flow financing.
Visit our Knowledge Hub for more information about business loans, how to apply and more!