4 Mar 2021
It’s never been more critical for businesses to have easy access to the right type of funding. COVID-19 has forced many businesses to pivot or close their doors until lockdown is lifted. However, for others, the situation has led to a significant increase in customer demand.
Whether your client requires a quick cash injection to ease the burden or business funding to meet an uptick in a surge in customer demand, alternative finance can help them with their needs.
If your client is struggling to get business finance through their high street business bank, you may want to signpost them to an alternative funding (alt-fi) lender. It might even be worth bypassing traditional lenders altogether and opting straight for alternative finance.
Due to the stricter lending criteria of traditional banks, it can be difficult for startups – and those with a less-than-perfect credit history – to get a look in. The application and approval process is also much lengthier, putting business owners who need cash quickly at a disadvantage.
Business loans from alternative lenders are generally more accessible, flexible and innovative. There are a growing number of alt-fi lenders on the market today with a strong appetite for lending. Alternative finance comes in many different forms. Let’s take a look at some of the most common types.
Until 31 March 2021, businesses can apply for a CBILS loan. To encourage lending, the Government makes a Business Interruption Payment to cover the first 12 months of interest payments, as well as lender-levied charges, so your clients won’t pay interest for the first 12 months. Those who have already received a CBILS loan might be eligible for a second.
Up to £5 million per business is available through accredited CBILS lenders – including high street banks and numerous alternative lenders.
CBILS finance comes in four alt-fi types: business overdrafts, term loans, asset finance and invoice finance. Facilities under £250,000 don’t require a personal guarantee, however loans above £250,000 may require a guarantee at the lender’s discretion (although Principal Private Residences don’t apply).
Secured business loans require the borrower to back their finance with collateral such as property or equipment. Many SMEs these days work remotely or rent their workspace, while others simply don’t own expensive machinery or equipment.
Fortunately, many unsecured business loans require no security whatsoever. The approval process is fast and depending on the specific lender, businesses could receive a decision within hours of submitting an application. The amount of money that a lender is willing to provide will depend to a large extent on the business’ creditworthiness.
It is important for your clients to bear in mind that unsecured loans often come with higher interest rates due to the higher level of risk to the lender. Some lenders will insist on a personal guarantee, however there are lenders out there that don’t.
A merchant cash advance is a fairly new type of unsecured business finance. It’s designed to provide businesses with a quick cash injection that is loaned against future customer card sales. It’s very flexible in the sense that instead of fixed monthly repayments, the borrower pays back the money bit by bit through a percentage of their card sales.
So, when the business is doing well, they pay back more – and vice versa.
If you’ve got a business client that needs a quick cash injection and doesn’t take customer card payments, but does invoice clients, invoice finance could help.
Invoice finance allows companies to receive payment for completed work faster. The lender advances the business a large percentage of the value of the invoice immediately. The finance amount minus the lender’s fee is credited to the business when the client pays the invoice. Invoice finance falls into three categories:
With this type of finance, the lender helps ensure that invoices are paid on time by providing credit control services.
In a sense, this is the simplest form of invoice finance because the business carries out its own credit control processes.
This can be a flexible form of invoice finance that enables businesses to identify which invoices they’d like to finance.
Lack of funds for assets is one of the biggest barriers to a business's growth.
Many SMEs simply don’t have the capital to be able to purchase vital equipment or machinery outright, and others don’t just want to because they deem it too risky or don’t want to invest in something with a short shelf life. That’s where asset finance comes in.
Hire purchase enables businesses to spread the cost of an asset and equipment leasing involves leasing the asset from the lender. When the lease expires, the business has a few options: they can pay the rest to own it outright, upgrade it or return it to the lender.
Business credit cards are suited to SME owners who don’t require a lump sum upfront but want to spread costs while keeping track of their spending. When used responsibly, having a business credit card can simplify cash flow management and help businesses to build up a positive credit score.
Much like with personal credit cards, the business agrees to a set credit limit and is required to meet a minimum payment every month. Benefits include rewards such as air miles, cash back, travel insurance and reward points, and additional cards can be allotted to employees to provide them with access to the funds.
Bridging finance is often a funding type that is associated with property developers and investors. However it can be used by a range of business types and for a variety of purposes. The key is to have a clear exit strategy in place because this type of finance is designed as a short-term solution to get you from A to B.
In the context of the property industry, a bridging loan can enable a developer to buy a property before they sell an existing one, or to fund renovations before a mortgage is secured. On the other hand, a startup taking part in an equity financing round that is due to complete in a few months may take out bridging finance to cover costs – such as office rent and supplier payments – in the interim.
Funding Options is partnered with over 120 alternative finance lenders, including 40+ CBILS accredited lenders. Using a combination of market expertise and technology, we search the market to find the right funding options for our customers’ situation.
Through Connect, our advisory platform, you can ensure your clients access the right funding so they can trade, plan and grow with confidence. As well as offering an instant comparison, we offer help throughout the process, from application to money in the bank. SME owners can get started by providing some basic details, including how much they need to borrow and how quickly they need funding.
Find out how we can support your clients' need for alternative finance here.
Chief Commercial Officer
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