The financial crisis of the late 2000s made a marked difference to banks’ willingness to lend; business overdrafts became harder to come by and business loan applications met more often with a rejection. Even companies with a respectable credit score and a solid financial history can find themselves turned down because their bank is decidedly risk-averse.
So what other business options are available?
Here we introduce the most common alternative finance routes available to business borrowers.
Asset-based finance for business is the process of borrowing money using companies assets as the security against the loan. Assets may include property, vehicles, equipment or stock, to be stipulated within the terms of the credit agreement. The greatest risk to the borrower is that defaulting on the loan may result in the repossession of key assets. Interest rates and terms will vary depending on the lender and the amount borrowed.
Debt crowdfunding (also described as loan-based crowdfunding and peer-to-peer lending)
The principle of debt crowdfunding is simple: rather than applying for a business loanbu from a single source, a loan application is posted on a crowdfunding website and multiple investors – who combine to become the crowd - have the opportunity to lend varying amounts towards the total loan request. Speed is the greatest advantage to the borrower, with fast decisions and release of funds often possible. Interest rates and terms will vary depending on the crowdfunding platform and the amount borrowed.
Invoice finance is a form of asset-based finance. Of the £20bn+ lent through asset-based lending in 2015, 80% took the form of invoice borrowing, according to the Asset-Based Finance Association (ABFA). Borrowing is funded against unpaid or accounts receivable (the assets, in this instance). This can work similarly to peer-to-peer lending and auctions, where multiple people or businesses bid for invoices, or may more closely follow the invoice factoring model, where factoring companies buy invoices in staged payments, minus fees. Fees, interest rates and terms will depend on the platform or provider, and whether a factoring route or asset-based loan route is more suitable will depend on the amount and commercial nature of the invoices.
Merchant cash advance
This alternative business finance model uses a card terminal as the basis for lending. The lender’s relationship with the card terminal provider allows them to take a percentage of the revenue paid via each card payment; it’s taken at source. These percentages form the loan repayment, rather than a fixed monthly sum. For this reason, it may be more suitable for businesses with seasonal or variable monthly revenue; it’s also one of the few areas of business borrowing which may not require a credit check. Percentage rates and terms of repayment will vary according to the lender and the nature and turnover of the business.
Businesses can apply online here at businessagent.com for crowd based lending, but please do be aware that borrowing can entail significant risk – for the business and for the directors if offering a personal guarantee – and that if you are unsure of the obligations or finances it is recommended that you seek advice from a qualified independent financial adviser.
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