The financial meltdown in 2008 has brought severe impact to the world economy. However, the savings in all corners have brought a million ways to move on and take to be back on track. The impact is still observable to small and medium enterprises. Alternative finance came into the market.
After all, the impact remains painful and dauntingly tricky for SMEs and even large companies to secure and access to funds and credit to build and support their operations and expansions.
Meanwhile, the big banks in the UK, Europe and elsewhere remain broadly reluctant and often unable to offer credit to SMEs. With this, reputable and reliable alternative sources of finance are starting to emerge and become popular in the business environment.
What is Alternative Finance?
- The development of Alternative finance is a range of credit products that are outside traditional banking.
- Alternative business funding has new avenues to finance for businesses that experience difficulty in accessing credit approval in the past, conveying innovative products and new ways of thinking to the finance industry.
- An alternative finance provider administers non-bank funding to small and medium-sized businesses through loans, finance, or the purchase of equity.
- The alternative finance options are ranging from peer-to-peer lending to invoice trading to crowdfunding.
- According to the 2015 NESTA alternative finance report, the largest alternative finance model by volume is the peer-to-peer lending.
Why SMEs need for Alternative Finance
Not all entities (banks, stock, bond markets) are eager to finance specific business due to a variety of reasons. For example, if a 2-year old company that has a technology that is seen to be not ready for the market for the next six years. Most likely, the bank will not fund that project because there is no revenue for eight years. Also, there is no guarantee that the company is ever going to be successful.
The different forms of Alternative financing will help the aspiring company to continue to research and develop their product and kick-off in the market.
Moreover, alternative credit platforms often are offering mentorship, customer validation, advice, and buy-in.
Different forms of Alternative Finance
There are various alternative finance forms of financing, but today, we will look at five alternative credit options for companies that are facing the challenge of bank approval.
Crowdfunding is the most common and public form of alternative financing. It is merely an online-based credit platform that allows many investors to invest small amounts in a business. The popular crowdfunding sites will include Kickstarter, Indiegogo, and GoFundMe.
A platform is a perfect option if a company that has customers who are confident about what they need to grow big and expand but the bank is not agreeing to the concept.
For example, producers of indie films are raising funds through crowdfunding platforms for purposes of marketing and capital raising. There is an investor that give donations, and in return, they get perks to lick rewards and early access to the film.
Other alternative forms of financing that include awards, competitions, and accelerators. Unlike the loans, you do not have to pay back the awards. Usually, the disbursement is done by one entity.
Frequently, the entity that facilitates the disbursement is a government unit. Often, there are a corporation, trust, or foundation that disburse for particular project implementation. Most grants require an extensive application process. Also, most gifts are for a specific purpose like research and development.
Business plans and financial analysis, as well as projections, are the topmost requirements in applying for Grants, competitions, and accelerators.
Mezzanine Lenders provide loans to companies and do not require to comply with all of the guarantees and collateral of a traditional bank. Their loan may have some aspects that are converting the debt to equity.
Also, the Mezzanine scheme is more expensive than a traditional commercial loan. It is as costly as using a credit card. However, these lenders are a great alternative to companies that may not be bankable.
Private Equity firms have funds and team of professionals that manage the funds that provide debt and equity to businesses. Usually, there is a “hold” period for the investment that runs from 3-7 years. The Private Equity (“P.E”) firms interact with other portfolio managing companies to streamline costs and bring best practices. In most cases, the P.E. firms have specializations in specific industry or market of their interests.
Bootstrapping is not a form of financing, but it is a strategy to free-up cash that can be utilized anywhere in the business
For example, a company will hire personnel on equity-basis rather than paying their salary. The option can be cheaper at the start for temporary purposes, but in the long run, it can become expensive.