Bank lending to small businesses saw a decline of nine percent year-on-year, dropping to £59.2 billion in 2023, as reported by the British Business Bank. This decrease reflects a year marked by high borrowing costs and economic uncertainty.
The state-owned development bank noted that this funding gap is now being filled adequately by alternative lenders and private debt fund providers. Products like asset finance experienced a growth of seven percent in 2023, reaching £23.5 billion.
Small Business Pro offers assistance in managing customers, processing payments, handling insurance, finance, and HR tasks, in addition to providing personal wellbeing benefits. To learn more about Small Business Pro, click here.
In a scenario where traditional bank support is not guaranteed, what are the alternative funding options available for small businesses? Where can small business owners seek funding if they need an alternative?
Alternative business funding options:
Invoice Financing:
For businesses that engage in selling goods or services on credit terms to other businesses, invoice financing can be a beneficial option to manage cash flow. With this alternative funding method, a lender pays you quickly, often within 24 hours, for your outstanding invoices and takes a percentage when the payment is received. While this can aid in accelerating business growth, it relies on the eventual payment from clients.
There are two forms of invoice finance: invoice factoring, where the finance provider advances up to 90 percent of the outstanding invoice and pursues payment from your customers directly, and invoice discounting, where the provider still advances a portion of the invoice, but the customer pays the business as usual.
Alternative Loan and Debt Providers:
Business loans can serve as a valuable resource for small businesses looking to purchase inventory, equipment, or assets. The repayment period for these loans can range from one to ten years, with a fixed interest rate agreed upon before taking out the loan.
Secured business loans necessitate collateral as security, meaning the lender can seize assets if repayment is not possible. On the other hand, unsecured loans are easier to obtain but typically come with higher interest rates. With banks becoming more cautious with their lending, alternative loan providers have gained popularity, often providing approval within 24 hours.
Merchant Cash Advance:
For businesses that process card payments through a card terminal, merchant cash advance offers a way to access cash more quickly. Unlike traditional bank loans, there are no fixed monthly payments or interest rates. Instead, the provider receives a percentage of future card revenue as repayment. This option provides a fast route to funding, with cash becoming available within 24 hours, compared to the three business days it typically takes for funds to clear through a payment processor.
Peer-to-Peer Lending:
Peer-to-peer lending, or P2P lending, matches borrowers with individual lenders through a P2P platform, facilitating quick and flexible loans at competitive rates. After disclosing the desired loan amount and repayment period, the platform conducts background checks, including credit scores, before connecting borrowers with lenders. P2P lending offers a swift decision-making process, with funds becoming available within days.
In conclusion, exploring alternative funding options can provide small businesses with the financial support needed to thrive in a competitive market. By considering invoice financing, alternative loan providers, merchant cash advances, and peer-to-peer lending, entrepreneurs can access the necessary capital to fuel business growth.