Here at Pegasus Funding, one of the most common questions we’re asked by small and medium-sized business owners is to explain the differences between traditional finance options (e.g. high street banks) and alternative finance such as peer-to-peer lending or challenger banks. In this blog, we look at both options to see which is best for your business growth.

Traditional Finance and Alternative Finance explained.

Traditional finance refers to the traditional methods of financing a business or individual, such as through banks or other financial institutions. Alternative finance, on the other hand, refers to newer, non-traditional methods of financing, such as crowdfunding or peer-to-peer lending. Both traditional and alternative finance have their advantages and disadvantages, and choosing which to use depends on a variety of factors. In this article, we will discuss when to choose traditional finance versus alternative finance.

When to Choose Traditional Finance:

1. When you need a large amount of capital: Traditional finance is better suited for businesses who need a large amount of capital. Banks and other financial institutions have access to large sums of money and are more likely to lend it to established businesses with a proven track record.
2. When you have collateral: Traditional finance often requires collateral to secure the loan. Collateral can be in the form of assets such as property, equipment, or inventory. If you have collateral, you may be able to secure a lower interest rate on a traditional loan.
3. When you have a good credit history: Traditional finance relies heavily on credit history. If you have a good credit score and a history of making payments on time, you are more likely to be approved for a traditional loan.
4. When you need a long-term loan: Traditional finance is better suited for long-term loans. Banks and other financial institutions are more likely to lend money for several years, and the interest rates are often lower than alternative finance options.
5. When you need a loan for a specific purpose: Traditional finance is often used for specific purposes, such as property purchase. Banks and other financial institutions have specialised loan products for these purposes, and they may be more flexible in their terms and conditions.

When to Choose Alternative Finance:

1. When you need funding quickly: Alternative finance providers can often provide funding more quickly than traditional finance providers. This is because they use technology to streamline the application and approval process, however the interest rates and costs will be higher.
2. When you need a flexible loan: Alternative finance providers often offer more flexible loan terms than traditional finance providers. For example, they may not require collateral, support non-homeowners, albeit for smaller limits, and may offer shorter repayment terms.
3. When you have a lower funding requirements: Alternative finance is better suited for smaller businesses. Banks and other financial institutions are often hesitant to lend money to newer businesses.
4. When you have a poor credit history: Alternative finance does not rely as heavily on credit history. Instead, alternative finance providers look at other factors such as historical accounts and bank account performance. If you have a poor credit history, you may still be able to get financing through alternative finance.
5. When you want to involve your community or customers: Alternative finance options like crowdfunding allow you to involve your community or customers in your business. This can help build a loyal customer base and generate interest in your products or services.

Summary

In conclusion, choosing between traditional finance and alternative finance depends on a variety of factors. If you need a large amount of capital, have collateral, and have a good credit history, traditional finance may be the best option. However, if you have a smaller business, need funding quickly, want a flexible loan, have a bad credit history, or want to involve your community or customers, alternative finance may be the better option.

It is important to weigh the advantages and disadvantages of each option and choose the one that is best for your specific situation. We have in-depth knowledge of traditional and alternative finance contacts that are relevant for your business. Speak to us today to find a solution for you.