Alternative Business Funding is a non-traditional way of business finance, without using a high-street bank. Since the financial crisis traditional lenders experience more challenges in small business financing. A finance gap emerged in the market, after which many alternative lenders entered the new financial landscape. Today, many modern lenders use technology as an enabler to optimise processes in traditional lending. These businesses are called fintechs (from Financial Technology) and together they offer a variety of alternative business funding options. Examples of these are financial lease, factoring, crowdfunding and online direct lending. Many small businesses are leaning towards alternative business funding as the process is considerably faster and requires fewer assessments, evaluations and documents compared to a traditional bank.
How does alternative finance work?
Business owners have traditionally always been dependant on banks for business funding. Since the financial crisis, most banks have become more cautious in lending to small businesses. Alternative lenders have since then taken in an important chunk of the financial market, offering alternative finance solutions in a modern and innovative way. For many businesses, alternative finance plays an important role in their funding, unsecured solutions being a great top-up in a modern day finance mix.
Why are businesses exploring alternative business funding?
Traditional business funding most often involves applying for a normal business loan with a traditional high-street bank. This often involves a lengthy application process that requires physical documents, lengthy procedures and difficult assessments that can present too many hurdles for SMEs . Furthermore, during periods of economic uncertainty, many banks are more reluctant to fund small businesses due to higher risk, having a great affect on small business funding. Higher chances to be approved in combination with swift and easy online processes cause SMEs to explore alternative business funding more and more often.
Alternative business funding helped Reflex continue to develop products and gain market share while maintaining their service levels. "That is what our customers expect and has been the key to our success.”
Alternative lenders are new businesses that are providing financing options for small businesses outside of the traditional high-street bank lending. Small businesses especially benefit from alternative lending as it is more likely that they will qualify for loans.
What sort of businesses qualify for alternative forms of financing?
Well established SMEs with a consistent revenue stream and a profitable business are the most likely to qualify for alternative forms of financing. Criteria depends on the lender in question. Ideal applications will have been operating for at least a few years and have a steady annual turnover of at least £500k.
Is alternative business funding risky?
This depends entirely on the type of funding, where the finance is coming from and the type of lender. Most alternative lenders act responsibly and have their clients’ interests at heart. Small businesses should check online reviews, such a Trustpilot, and do their own research into the alternative lenders. They should check the lender’s underwriting process, responsible lenders will never approve a business for more than it can carry.
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