At the start of the year, we know a lot of businesses - your customers - are looking at cash flow. The bank loan used to be the first port of call for a cash injection. But nowadays, there are many different options available. We teamed up with our friends at Funding Circle for the inside track on alternative finance options.
What are the alternatives to bank loans?
Business owners are looking at alternative ways to boost working capital, cover day-to-day running costs, and invest in their business’s future. And they often look to their accountant for recommendations. As always, the most appropriate option will depend the specific needs of their business. Here are a few ideas:
Alternative business loans
Business loans can be used for almost any purpose, for instance:
- Working capital
- Paying for a website
- Funding a marketing campaign
- Paying staff
- Buying equipment or stock
Taking out an unsecured loan can be a good choice if the client doesn’t have assets to use as security, or if they may want to sell their valuable assets in the future. They can also save time as you don’t need to get assets valued when you apply for the loan.
You can find more information about Funding Circle and how to apply here.
Peer-to-peer loans are managed via platforms that connect investors with creditworthy businesses. Rather than offering finance in exchange for equity, the investor gets a return on their investment in the form of interest.
Microloans are generally smaller than short-term loans and spread over a shorter period. The advantage to microloans is that they allow businesses to borrow a small amount of money to ease cash flow or purchase stock, without the need to commit to a larger loan or an ongoing line of credit. However, microloans tend to have far higher interest rates.
Early stage & development loans
Some business loans are specifically designed for start-ups and early-stage enterprises. These loans are available from banks, online lenders and the government. For example, the UK Government’s Start Up Loan Scheme offers new businesses the chance to borrow up to £25,000 (£7,200 is the average loan amount) over 1 to 5 years, with a fixed interest rate of 6%.
A commercial mortgage may be a good alternative to a bank loan, if the business is hoping to buy land or premises for business use. Business mortgages differ from residential mortgages in that the value of commercial property is usually far greater. Like ordinary mortgages, commercial mortgages are secured against the land or premises purchased. The downside to commercial mortgages is that the business may need to put down a deposit of up to 30% of the property’s value.
Mini bonds are a form of debt finance. Businesses wishing to raise finance can offer investors mini bonds in place of shares. When the bond matures, the investor recoups their money. In the meantime, they receive regular monthly or annual interest on the amount they invested.
Asset financing is taking out a loan up to the value of a business asset. The loan is secured against the asset and paid back with interest. Asset financing works well for businesses that use vehicles, valuable equipment, or other assets to borrow against.
A longer version of this article can be found here https://www.fundingcircle.com/uk/resources/business-finance/bank-loan-alternatives/