Commercial loans from alternative lenders operate the same way as traditional loans, except they tend to come from non-conventional lenders rather than banks.

These lenders often have a more risk-open mindset, allowing them to accept a broader range of businesses for funding. They tend to have faster turnaround times, as they’re online.

There are many options under the ‘alternative loan’ umbrella, including short and long-term solutions. It is worth researching different lenders to uncover what is available, including how much funding may be raised, the criteria you need to meet. This will enable you to discover the right loan for your business.

Crowdfunding

Crowdfunding has become prevalent in the last decade. It sees individuals contribute small amounts, which are pooled and then generally invested in a business in exchange for shares.

The crowdfunding type determines how the funding is repaid: through distribution of shares or other incentives.

It is done mainly through crowdfunding platforms, including Seedrs and Crowdcube. You need to have a compelling campaign that encourages people to want to support your business. Exciting business ideas, charitable causes or addressing niche market needs will improve your chances of generating a buzz.

If you are successful, it is an excellent way of raising finance without going through a bank or financial institution. 

P2P funding

P2P funding is like crowdfunding because multiple individuals and institutions provide amounts of money to create a larger loan. You repay the debt per an agreed payment schedule.

It is worth mentioning that P2P lenders consider risk, meaning that those with a poor financial history may struggle. However, they still tend to be more open than many banks.

P2P lending is often conducted through online platforms. You need to submit an application supported with financial information, which should highlight your business positively if you want to be successful. 

Venture capital

Venture capital is a form of equity funding aimed at early-stage SMEs with high growth potential. They are open to even high-risk companies (provided there is sufficient reward to outweigh the risk). It is a good option for businesses that have failed to secure finance elsewhere.

Venture capitalists tend to be highly selective with who they work. As such, the acceptance rate is low. If you are accepted, they expect an internal rate of return of at least 25% on their investment which is usually held for five to eight years.

They aim to make your company as successful as possible. Alongside funding, they will offer additional support, including business guidance, access to resources and networking opportunities.

If you offer substantial growth potential and are prepared for hands-on input, you will likely benefit from venture capital investment.

Angel networks

Angel investment sees seasoned business experts with a high net-worth invest in growing businesses. Angel networks give you the chance to meet numerous investors to find one who wants to support your company in exchange for shares

When approaching an angel network as with any other equity funder, you must be prepared to pitch your business. Your pitch should favourably demonstrate the value of your company and what you will achieve with funding. The investor’s goal is to achieve a return on investment, so you must showcase the return you will provide it.

The biggest challenge is finding an investor who suits your business and convincing them to work with you. Once you do this, there are many benefits, including sizeable funding and expert advice that leads to success. However, it’s also crucial to be prepared for a long relationship in which the investor is entitled to dividends.

Mezzanine finance

Mezzanine finance combines debt and equity.

An example of mezzanine finance is where a loan is taken out, which converts into shares after a set period. The borrower has the chance to pay back the loan (either as a lump sum or through instalments) before the agreed timeframe. If not, the lender converts it to shares in the business, which will hopefully increase in value over time.

Alternatively, shares are used as collateral, giving the lender the knowledge that they can convert to shares in the event of default. In these contexts, the lender would get interest payments as in a standard loan, plus a share of profits.

Mezzanine finance is complicated, so it is worth speaking with a lender to understand the technicalities of your arrangement and the implications.

Invoice finance

Invoice finance offers a loan using your unpaid customer invoices as collateral. You may unlock as much as 90% of the value across your invoices. The primary security the lender needs is your invoices, meaning there is easy access for any business that sends invoices to other companies.

The lender gives you funding for a set period while you await customer payment. You then use those payments to repay the borrowing. It is a valuable way to overcome the issue of late payment without straining your cash flow.

Invoice finance is a great way to manage cash flow and inject capital into your operations if you deal with invoices. Spend time considering the options (particularly factoring versus discounting) to find the best deal for your company. 

In summary

Alternative funding is a fast growing area in the UK, offering increased accessibility for many SMEs.

It is worth considering alternative options if you are looking for a solution. It’s especially critical if you have struggled to get finance previously or are looking for more flexible criteria than traditional funding routes offer.

To find the perfect option for your business, speak to the Pegasus team.