The financial landscape has undergone considerable change over the past decade. New technology combined with a worldwide recession has led to the birth of a new type of external financing, known as alternative financing.
Alternative finance products makes use of technology to not only connect lenders with borrowers but also to make quicker decisions. And going by its popularity over the past few years, it would be fair to say that the market for alternative finance is definitely exploding.
Now, is this going to make a difference to small business owners?
Yes, it does!
The emergence of alternative finance products gives small business owners multiple options to choose from when they are looking to raise extra capital. Consider that you need extra capital to stock up or grow your inventory. Or maybe you need the money to cover for a slow period.
In such situations your chances of being approved for a bank loan is pretty slim. But, now you have the option of approaching an alternative finance lender to secure the required capital for your business.
The application process for alternative finance products is considerably shorter than a traditional bank loan and in some cases it can be processed within hours.
Let’s take a look at some of the most popular alternative finance products available in the market right now:
Business Cash Advance
In this type of finance, an alternative lender will provide you with the required funds in exchange for a fixed percentage of your business’s future credit card sales. For example, if you borrow £20,000 you will have to pay the lender 10% (or whatever percentage was agreed upon) of your company’s daily credit card sales, until the loan amount plus interest is paid off.
Businesses that have a high number of credit card transactions are deemed eligible for a business cash advance majority of the times. However, the interest rate on a cash advance for business can sometimes be on the higher side.
Revenue Cash Advance
This product functions similarly like a business cash advance but with the distinction that it is mostly applicable for companies that don’t have a high number of credit card transactions. In this scenario, a business will pay back a small amount to the alternative lender each day via a direct deposit.
Needless to say, the applications for revenue cash advances are processed pretty quickly. Another benefit of this product is that it can be availed by businesses that are not considered eligible for a traditional bank loan.
Again, it is important to not that interest rates charged on revenue cash advances are pretty high.
Receivables Based Financing
This type of finance is also similar to revenue or business cash advances, but for the fact that the lender will analyse the borrower’s invoice collection and accounts receivable history before determining their eligibility.
Once your loan application is approved, you can borrow either against individual invoices or your total account receivables balance. This type of funding is becoming increasingly popular because of the fact that once the application is processed and approved, the funds is immediately made available to the borrower.
The interest rates charged on account based receivables is comparatively lower than revenue or business cash advances.
Accounts Receivable Factoring
Factors buy out all your unpaid or due invoices at a discounted rate, usually 5% and after that your customer makes the due payment directly to the factor.
The interest rate charged annually on this type of finance can be pretty steep, but with the evolution of financial technology, business owners today are afforded with a greater amount of flexibility when choosing how much they want to borrow and when.
Loans, Micro-loans, and Lines of Credit
As opposed to a conventional bank loan, lines of credit allow small business owners to borrow money, pay it back and then borrow again for the length of the line of credit.
Yes, I know what you are thinking lines of credit are also offered by banks, what makes this an alternative finance product? If the funds are made available to you quickly or if the lending criteria used is different to that of a bank, it qualifies as an alternative finance product.
Microloans are loans that are much smaller than the usual bank loan. While microloans are usually made available in developing countries, some providers are also offering small business owners in developed countries the chance to avail this product.