Alternative finance can be a fast and flexible source of funding for small businesses, explains Michael Farrell.
Reluctance to borrow and lack of awareness of alternative finance options can be a barrier to growth for many businesses. A recent UK survey found 70% of smaller businesses opt to forgo growth rather than taking on external finance and 57% are not confident in their eligibility to secure traditional loans.
Traditionally, owner capital and banks were the first port of call when businesses wanted to raise finance. Today, while these traditional funding sources are still important, businesses can also seek to access funds from a wide range of alternative finance sources. The advantages of these alternative sources of finance often include speed and flexibility.
Types of alternative finance
• Asset-based lending (ABL) is a form of secured lending where loans are advanced against business assets such as debtors, stock plant & machinery and property
• Invoice discounting is where a business borrows against unpaid invoices owed to them. The amount owed to the lender decreases as the invoices are paid.
• Factoring is where unpaid invoices are sold to a third party who then collect the debt themselves.
• Trade finance is a type of short-term financing often used by import and export businesses.It is usually secured on goods or backed by an insurance policy.
• Patient capital is a type of funding where investors are willing to make a financial investment in a business without the expectation of turning a quick profit.
• Venture capital is funding provided to early stage businesses with high growth potential
• Business angels or angel investors provide capital (and often mentoring) for early stage businesses in return for equity.
• Peer-to-peer lending where individuals or businesses access finance through online platforms that match lenders with borrowers.
• Crowd funding is where a business raises small amounts of money from a large number of people.
Other types of alternative finance include micro finance which is sometimes used to describe loans to low-income individuals who might otherwise not be able to borrow and/or small loans to start up businesses and social finance which is the provision of finance to voluntary and community organisations.
Grants and tax breaks
Government-sponsored programmes also provide valuable financial incentives to help certain types of businesses realise their potential. Previously on this blog, for example, we have looked at the advantages of R&D incentives. In our experience, when businesses review their operations to see what activities they are doing that could fall within the scope of available grants and incentives, they are often surprised. However, applying for these incentives can be tricky and it is always advisable to seek professional advice.
Find out more
PKF-FPM will host a corporate finance workshop at the Armagh City Hotel on 7 June 2018. If you are seeking to grow your business and interested in finding out more about funding options, contact us for details.
Michael Farrell l Director