As the most unpredictable element of running a small business, cash flow inevitably presents an ongoing challenge. It’s a common problem whether the company is still in its infancy or tackling ambitious growth plans.
For businesses in either of these stages, day-to-day operations can be erratic, sales not always consistent and resources scarce. The sheer effort required to make sure you are functioning to meet demand means that it can be challenging to produce a monthly sales forecast and predict any likely losses.
With 80-90% of businesses failing due to low cash flow, not addressing and stabilising any associated issues early can affect your company’s long-term potential.
Therefore, the value in keeping your cash flow under control can not be underestimated; it is the centre point of any long-term business strategy.
But the ‘newer’ options for tackling cash flow need to be better understood. In recent years, there has been a gradual realisation that there’s more to finance than just the banks.
Simultaneously, as they have become a more risk-averse source of funding, alternative finance providers have taken advantage. And this has helped many small businesses to wade through the standard cash flow dilemmas successfully.
In our blog, we explain why alternative finance often comes out on top when it comes to cash flow management.
- Risk openness
- Access to a wide variety of options
- What to bear in mind before committing to alternative finance
A specific point of appeal for alternative finance over traditional forms is the attitude to risk conveyed. Banks are typically seen as highly risk-averse, with applicants expected to give other supporting evidence that proves their ability to repay a loan and have assets in place to act as collateral.
Whilst the lending criteria of banks continue to be rigorous and mostly inflexible, alternative finance providers are more amenable and willing to consider a more comprehensive, riskier range of companies to lend to.
Irregular cash flow is suddenly less of a problem. As long as you are in a position to demonstrate a consistent and sustainable income, coupled with the ability to make routine repayments, you’ll be in with a chance of securing some funding.
This is ideal for enterprises deemed high-risk – fairly or unfairly – as it offers them a better chance of getting the finance they need.
There is a pay-off here, however. By being more open to risk, these lenders often charge higher interest rates and admin fees to offset the increased risk factor. So, you need to consider this and spend time reading the small print to ensure you are completely satisfied with what you are committing to.
One of the critical benefits of sourcing alternative finance is the speed at which it can translate to money in your bank account. In some cases, this can be as little as 24 hours.
In comparison to applying for a bank loan, which can be a lengthy process, alternative lenders can provide approval quickly. Much of this is down to the fact that less supporting documentation may be required due to the reduced aversity to risk from alternative lenders.
Alternative lenders are increasingly online-exclusive, which helps to reduce the time taken to apply. Not only do people feel less pressurised in an online situation, it’s easier to factor in applying for finance if you need less interaction with the lender.
The speed of alternative financing makes it an ideal solution for a small business, especially one seeking short-term funds to plug a temporary cash flow gap. These businesses will often be in urgent need of support so they can continue to meet payments and keep operations going, so speed will be welcomed.
Most cash flow scenarios, although largely unexpected, are not for the long-term. Something as simple as a late-paying customer, or a substantial sales order, is often the catalyst and just require a quick remedy. It’s even possible that single invoice finance or selective invoice finance might be all that is required in some situations.
So, those looking for cash flow support often only need a short-term fix, which alternative lenders can offer.
A commercial loan’s rigidity is based upon a fixed amount over a given period, with regular repayments until the debt is fully recovered. This can be over-complicated and unnecessary when funding is required to tide a business over from one month to the next. Avoiding having to put together a large supporting pack of information is a huge benefit to small businesses with a primary focus on the day-to-day running of their operations.
Access to a wide variety of options
Due to the increased agility that many alternative lenders offer, they tend to offer a wider variety of options. As there are plenty of alternative lender, you should be able to obtain competitive terms, such as interest rates and fees, from them. This will enable you to find a solution that truly works for you.
As well as offering different solutions, away from the norm provided by traditional finance, there is reduced lender control with alternative funders. With banks, there will often be set limitations on how funding should be used. There is much less restriction with alternative finance, allowing businesses to use the funding to their own devices mainly.
In this sense, alternative funding can be used to meet a broader range of needs, and many businesses may appreciate the reduced control associated with these forms.
What to bear in mind before committing to alternative finance
While alternative finance brings welcome variation to the lending market, it is still essential to ensure it is right for you. Don’t underestimate the preparation you still need to do to ensure your business is investor ready. Both traditional and alternative funding providers will need to see the same necessary groundwork, including:
- Filed accounts for the last financial year
- Management accounts for the year to date
- Bank and VAT statements
- Details of any existing loans and personal guarantees
- Aged debtor and creditor reports
Cash flow solutions are not a long-term strategy to keep your cash flow under control by repeatedly accessing external finance; funding dependency is not a good strategic move. Instead, you should consider your credit management processes and how they alone can stabilise the money and its frequency into your business.
So, be considerate as to what support you need and ensure you are pursuing the best funding source for you.
Many factors have contributed to the increased take-up of alternative funding solutions like peer-to-peer lending and crowdfunding, all of which are easily accessible online. Streamlined application processes have undoubtedly given way to more straightforward submissions, increased flexibility and more favourable terms; finance is more accessible in the alternative arena.
The alternative finance market is set to experience a compound annual growth rate of 10% between 2020-2024, showing no signs of declining popularity. It has opened up a finance avenue that small businesses are just starting to tap into more and more.
If you seek a short-term fix for cash flow issues, it is well worth looking into alternative finance. However, be sure to understand the fine print to make sure you have identified an adequate solution for you.
If you’re looking to grow your businesses and need advice on how to access and get the best terms from alternative finance solutions, speak to one of our advisors.