Understanding Different Types of Alternative Financing Solutions
If you are planning to open a small business but are short on finances, you are likely going to end up applying for a loan. Traditionally, the first choice is to go to a bank. But unknown to many small business entrepreneurs is the availability of non-traditional funding options.
The umbrella term used to describe non-traditional methods of acquiring funds is alternative finance solutions. It is a billion-pound industry in the UK, and most of these firms offer their services online to cater to their target market in a more efficient manner. To understand alternative finance solutions better, here are some of the most common examples.
This form of alternative financing utilises company invoices to free up cash. For example, a business that deals with manufacturing doesn’t have to wait for payment from customers in order to have the necessary funds for operational expenses such as employee wages. One of the primary benefits of invoice financing is that there is no need for the company to use assets as a form of security. This is most beneficial to small businesses that don’t own property which can be used as collateral.
Similar to invoice financing in principle, invoice trading, however, takes advantage of an online network to auction off business invoices. This is a highly efficient way to get access to funds where businesses can typically get funding in as little as 48 hours. This option helps small enterprises have greater control over their finances.
This form of alternative financing is also called social lending. In the same manner as invoice trading, the party who needs financing joins a network where on the other end are investors who are willing to use their own personal finances to fund a business. In contrast with a bank, the process of peer-to-peer lending is straightforward and quick. For businesses who are struggling with getting loan approvals, this can be the solution. Investors in this platform can benefit from the interest rates while the business looking for funds can proceed with operating the business.
Unsecured business loan
Another attractive alternative financing option is unsecured loans. Unlike their more traditional counterpart, unsecured loans don’t require the borrower to provide collateral. This is primarily based upon how creditworthy the borrower is.
A number of start-up companies with innovative ideas often get their funding through these channels. Some of the most popular include Kickstarter and Indiegogo. These platforms allow individuals to offer their monetary support to projects or ideas they feel are likely to succeed. Some of these channels offer those who donate gifts or rewards to entice them to donate.
In many ways, alternative finance solutions are the life-blood of many businesses across the UK today. Many banks today have adopted stricter lending processes making it more difficult for start-ups and small businesses to get approved for loans. This, in turn, has fuelled the demand for alternative lending boosting the market and making it the go-to solution for most enterprises.