Rewind a decade and you wouldn’t have come across the alternative lending market in the same way that we know it today.
Put simply, the alternative lending market came about because after the financial crash of 2008/2009, when banks effectively opted out of loaning money to smaller businesses. Now, whether that is right or wrong, we all have our own opinions and the banks have had to repair their own balance sheets to try and survive. And, unfortunately, things being what they were, just as SMEs needed essential help to see through some bad times, banks raised the white flag.
Ten years on and the SME funding environment has totally changed and out of a crisis has grown the Alternative Funding Market and it’s an opportunity that businesses must fully harness.
So, a decade ago you would have usually sourced money from people you knew, banks, or the markets. Much seed corn capital is provided by families and friends of business founders and that remains a viable source of money. Banks who are strictly regulated have not left the market, but they are more interested in providing banking functions, such as an account to businesses, rather than commercial finance in the form of secured loans.
And if they do lend, then the criteria is strict and your company has to be of a fair size and asset rich. They do not like unsecured loans.
But, when friends and families have been exhausted (and they are usually involved at the start-up stage and not really appropriate for the later-stage financing), you really have to look elsewhere. And that means looking beyond the concept of business loans to the myriad of other mechanisms. These include invoice finance, invoice factoring, invoice discounting, trade finance, purchase order finance, supplier finance, property loans, commercial mortgages, buy-to-let mortgages, property development finance, bridging finance and challenger banks.
Let’s take a look at two of these alternative finance methods. Firstly invoice finance (which is also known as invoice factoring and invoice discounting) are some of the most popular because they are based on the simple process of specialist lenders exchanging your invoice for cash. Okay, now the customer should do that, but every company takes as long as it can to pay their bills, and it can take from 15 to 30, to 60, or even 90 days to get paid, depending on the nature of your business. With invoice financing, you get the majority of your money within a few days
Now on to challenger banks, which are increasing their involvement in the alternative finance space. The clue is in the title of the course and these are being established to challenge and take on the bigger, high-street banks. These entities are still banks, still need a banking licence and are regulated by the authorities.
They are mostly started by finance visionaries who believe that alternative finance has a major part to play in the UK personal and business banking sector, and more particularly the SME space. They are smaller institutions, with manageable loan books and fewer resources, but they come with less baggage. Most importantly, their staff understand SMEs and the challenges faced when building companies. So, they can be more commercial in their decision making and don’t always need to see piles of cash in the bank, triple-A credit ratings and a desirable property portfolio.
Challenger banks are now firmly part of the financial ecosystem and making great waves, but even so, you shouldn’t see them as an easy touch. Like any other bank or lender, they have credit guidelines and an underwriting process. Often their lending criteria might be favourable to a sector they understand or wish to develop.
Alternative Lending Market
Along with the other methods mentioned above, challenger banks are one you should consider. And this is the very reason why you should use a broker, because it is they who understand the alternative lending market so that you get presented with all the choices and options.