Alternative Finance – A case study and more…

Back in the mists of time, a business owner could go to his Bank Manager and ask for a loan. If he could confirm that he would be able to repay that loan, the money was his. Fast forward to now, and life isn’t like that any more! The banks ARE still lending, but they are far more considered than they used to be. This is where Alternative Finance comes into its own, particularly for non-tangible purposes.

Case Study

A long-standing contact came to us in a tricky situation.

• The business had lost a key customer, and was feeling the pinch as a result.
• The business was running at a loss and previous lenders wouldn’t advance further sums, while creditors were becoming impatient for payments.

The Directors of the business believed there was a way forward, if only the immediate pressure could be relieved. At this point we introduced them to one of our contacts in the Alternative Finance market.

Over the next few weeks, a deal was agreed, as follows:

• The company was loaned £125,000 over two years.
• Outgoings reduced by £11,000 per month.
• Importantly, it allowed them to consolidate the existing debts.
• Stress levels were drastically reduced.

Combined with our help in restructuring the business, the injection of cash has improved the outlook for this client. They have a clear model, and a clear budget. As the focus is now on the future, rather than the calls from creditors, it has been great to see sales exceeding targets for the last two months, and several large contracts coming through.

There are many types of finance that fall under the ‘Alternative’ heading. Some business owners have firm opinions around what they will consider and what they’d prefer not to. For example, invoice financing had a bad reputation for many years. If you are in need of additional finance though, and the major banks are either too expensive or unwilling to lend, some modern options can solve that problem in a creative way.

It’s key though to make sure that you are well informed as to the options available and to ensure you’re using reputable contacts.

Types of Alternative Funding

The following is not supposed to be an exhaustive list, but to illustrate the many options available. New products are appearing all the time, so it’s sensible to look at the landscape when you are in need and to check what may have changed.

• Crowdfunded Business Loans – Relatively low cost, flexible loans from ‘the crowd’, small investors who each lend a percentage of the whole amount.
• Unsecured Business Loans – Small Business loans that don’t use your property as collateral.
• Secured Business Loans – The reverse of the above, a small business loan that is secured on an asset such as a property, which for most business owners is usually the family home.
• Asset Finance – Finance to obtain cars or equipment for the business.
• Invoice Discounting / factoring – Instant access to cash tied up in your unpaid invoices, keeping cash flow steady.
• Bridging Loans – Short-term access to money to allow you to complete on a purchase before the sale, usually of property.
• Commercial Mortgages – When buying property for business or investment purposes.
• Merchant Cash Advances – Using income from your credit card turnover to gain finance, potentially overcoming some seasonality in a business.
• Pension Led Business Finance – Use your pension to finance your business via a SSAS.
• Development Finance – Finance for renovations or building a new property.

What to look for when considering Alternative Finance

It’s key to ensure that you’re speaking to properly regulated advisors. Follow the guidance below and it will put you in a good position, but please ask questions and do your own due diligence as well.

1. Make sure anyone you talk to is regulated by the Financial Conduct Authority (FCA) – you can check who is here.
2. Members of the National Association of Commercial Finance Brokers (NACFB) all adhere to an industry recognised Code of Practice, and have to have similar protections for their clients to those that we do. This includes Professional Indemnity Insurance and a strong experience.
3. Check how long they’ve been trading; you want to work with someone who knows the market and has a sound experience, not someone who’s seen an opportunity with the growth in the sector.
4. Ask how many lenders are in their panel. Whilst its no guarantee of a successful outcome, a larger panel could indicate a better chance of flexibility.
5. Find out how they make their money. Are you going to be charged a large fee, or do the lenders pay them a commission?

What might increase your chances of success?

1. Declare everything up front. Surprises don’t encourage confidence with a lender, so make sure they know all of the facts from the start!
2. Have clean bank statements with no bounced items, period where you exceeded an overdraft or other horrors within the preceding three months, ideally six.
3. Good credit scores from Directors help significantly.
4. Plan in advance if you can, so that you have time to consider various options.

The Alternative Finance market is growing rapidly; the landscape looks very different now even compared to two years ago. If you’re looking for finance for your business, get in touch to find out more about how we can help.