Gone are the days when you were able to rely on your bank for raising finance, come to think of it, gone are the days when you are able to rely on your bank for much.
The banks are facing a battle against alternative finance providers who are seemingly able to provide quicker, easier and more flexible ways to raise finances but are they all they are cracked up to be?
To borrow from a bank you normally have to prepare financial projections, fill in lots of paperwork and provide personal guarantees. It sometimes seems that only when you can prove that you don’t need the money that they will actually lend it to you. If you do meet the criteria things seems to move at a glacial pace.
So here are some alternative funding providers that may suit your business. Innovative, modern and easy to arrange but be warned some may be more expensive.
Alternative 1: Funding Circle – https://www.fundingcircle.com
According to their website, Funding Circle is the world’s leading marketplace exclusively focused on small businesses — more than £600m ($1bn) has been lent to 10,000 businesses in the UK and USA.
Businesses can borrow directly from a wide range of investors, including more than 40,000 people, the UK Government, local councils, a university and a number of financial organisations.
In March 2013, they began lending £20m to small UK businesses through Funding Circle, as part of its business finance partnership scheme.
In early 2014, the Government-backed British business bank investment programme decided to invest a further £40 million alongside other investors, to support economic growth by providing more efficient finance to small businesses.
Loans are unsecured and can be used for:
- Working capital
- Cover one-off business costs
- Buy an asset
- Develop a property
- Get a commercial mortgage
To apply, borrowers fill in an online application form and the Funding Circle team promise to come back within 2 working days. The loan request is then listed on the website and the process of it being funded starts. Registered Funding Circle investors start offering amounts of money to fund the loan, at interest rates they’re happy to lend at.
The minimum bid rates investors can offer vary by risk band and only the lowest rates will become part of the loan. Interest rates start at 6%.
Most loans are auctions and the higher rates can get knocked out of the loan request as more competitive bids are placed.
The loan can be accepted as soon as it’s fully funded. Alternatively, auctions can be kept live until the end of the listing period to see if the rate will fall as more bids are placed.
If you’ve applied for an unsecured loan, once you’ve accepted your loan online, you will receive the funds within 2-3 working days.
Using the calculator on the website, based on borrowing £50,000 borrowed over 1 year, there is a monthly repayment of £5,237 and total payable back of £64,043
Alternative 2: Funding Tree – https://www.fundingtree.co.uk
According to Funding Tree’s website they are the first fully regulated loan and equity crowdfunding platform in the UK.
Business owners have to present a business case for lending and can include a pitch and business plan.
Using the information on the site, based on borrowing £50,000 borrowed over a year there is a monthly repayment of £4,303 and total payable back of £51,636.
It should be noted this illustration seemed less firm than Funding Circle but that may have just been my perception.
This site also seemed to require potential borrowers to jump through more hoops.
Alternative 3: PayPal Capital – https://www.paypal.com/uk/webapps/workingcapital/
This is one for the merchants out there; businesses who trade through PayPal.
Designed for merchants with a strong sales history through PayPal, cash advance allow merchants to access funds quickly.
This is how it works:
- Once you have logged on you select the amount you’d like your business to borrow. The maximum amount available depends on your PayPal behaviour.
- You then choose the percentage of your future sales through PayPal that will go towards repayment of your loan and the associated fixed fee. The bigger % the less the fee.
- You then receive the funds straight away to use as you wish for your business.
Repayments are taken from your future sales up to your cash advance plus the fee and you can make one – off over repayments without any penalties.
It is not as easy to calculate how much borrowing £50,000 would cost on this site as each quote is specific to the individual companies PayPal activity. However, we think for the right business this is a pretty unique and innovative way to borrow but only if you trade through PayPal.
Alternative 4: Growth Street – https://www.growthstreet.co.uk
With a seemingly different approach than the other providers in this article, Growth Street, are aiming to reverse the trend of less and less overdraft approvals.
They aim to do this by providing good, growing businesses with an overdraft alternative.
Their offering provides overdraft facilities of between £50K and £150K, with a USP that interest is only charged on drawn funds at annualised equivalent rates between 8% and 12% (monthly equivalent rates of 0.6% to 1.2%).
The criteria for lending includes
- Being a limited company registered in the UK
- Having annual revenues over £500,000
- Be profitable
And interestingly the company must use cloud based accounting software
It remains to be seen if Growth Street can steal a march on the banks but they promise to approve or reject loans in 3 days whilst it can take banks up to 30.
However, the requirement for revenues of £500,000 will limit many small businesses who, for now at least, will have to visit their bank for their overdrafts.
Alternative 5: Market Invoice – https://www.marketinvoice.com/
Invoice Finance is an option for businesses who have to give their customers credit terms. It works best where the customers are almost guaranteed to pay, albeit late, e.g. supermarkets.
Traditionally, Invoice Financing or Factoring has been whole book where you have to sell all of your invoices but the downsides included sizeable fees and the administrative burden of running separate ledgers.
As we have seen in many areas where there are downsides and problems there usually comes along an easier alternative. Market Invoice aims to allow you to only sell the invoices you want to and do not tie you into contracts.
Invoices are put on a platform where they are sold to the investors.
Fees are applied on a trade-by-trade basis and vary according to a number of factors, including invoice value, expected payment date and the number of invoices you’ve traded with us so far.
The total fee for an invoice sold on Market Invoice is, on average, between 1% and 3% of invoice value.
To use Market Invoice your business needs
- At least 6 months of trading history
- Revenues of at least £100,000
Conclusion
In November 2014 Nesta and the University of Cambridge published a large scale study on the UK alternative finance sector.
The report estimated that the UK alternative finance market grew to £1.74 billion in 2014, £1 billion of which was working and growth capital for UK companies. However, this number only equated to 2.4% of bank lending to UK businesses.
As you can see there is a long way to go before alternative financing makes a dent in the banks position as the go to lender. But should the banks be worried?
In our opinion yes, with more and more innovative companies coming along, disrupting the status quo and as business owners becoming more comfortable with technology the banks will have to change or risk losing a substantial proportion of their market share. More competition will, ultimately, be good for us the consumer.
