The business finance market is broader than ever. There are now many options available to businesses of every shape and size, helping them overcome their financial issues.

However, despite the growing range of financial solutions, many businesses have chosen to move away from traditional funding avenues. Gone are the days when high street bank loans and overdrafts were the norm, with more people selecting alternative solutions to fulfil their requirements.

In a world where businesses face more complex and diverse problems, alt finance provides new options for even high-risk ventures, including venture capital, private equity, crowdfunding, and peer-to-peer lending. As such, it’s no surprise that alternative funding is on the rise in the UK, with lenders taking advantage of the gaps facing the business population.

In our guide, we have answered the question as to why alternative funding solutions are growing in popularity and how businesses can benefit from it.

• Is alternative finance on the rise?
• What are the advantages of alternative finance?
• What to consider before pursuing alt finance

Is alternative finance on the rise?

A report from the British Business Bank, published in 2020, highlighted the significant long-term growth in alternative finance over the previous five years in the UK. Data showed a 32% increase in asset finance, a 131% increase in equity finance and a 374% increase in marketplace business lending, all in the alternative sector. This was despite gross bank lending flatlining in the same period, suggesting a higher proportion of companies are choosing to use alternative options over traditional.

Beyond this, research released last month found that a third of SMEs intend to use alternative finance in the future, especially as they seek to recover from the ramifications of the coronavirus pandemic.

It’s also telling that a number of alternative lenders were accredited for the Bounce Back Loan Scheme (BBLS) during the pandemic, signalling the government recognising these lenders and bringing them into the mainstream market.

The data and acceptance of alt lenders under the BBLS shows businesses have increased access to alternative finance. It’s also likely this upwards trend will continue as more companies become aware of the worth of alternative options and feel more comfortable utilising them for their financial solutions.

What are the advantages of alternative finance?

With more people taking to alternative finance, you may be asking why. Many advantages are associated with the rise of alternative finance, making the lending market more accessible to more businesses. We’ve listed the benefits below.

1. It increases competition in the market. In any market, competition is usually a good thing as it forces businesses to improve their offering. For lenders, this means creating products that offer value for companies by providing lower interest rates, more favourable terms or lower fees. With this, companies can shop around to find a deal that works for them better.

2. It gives options for higher-risk businesses. Traditional lenders, like banks, are often seen as risk-averse. This makes it hard for a company that is seen as high-risk or has no security to offer against a loan to secure the funding they need. In fact, 80% of SMEs face rejection from banks.

 Alternative lenders tend to be more open to risk, enabling them to offer agile solutions for unconventional businesses or those deemed high risk. Unsecured loans are also a possibility, though there may be higher interest rates as a result. This means that companies who have historically struggled to obtain finance through traditional routes may find themselves with more options and a higher chance of being accepted.

3. Easier application processes. The majority of alternative lenders are online-based, so their services will be carried out digitally. This means that they can serve customers all over the UK, rather than applicants having to rely on what banks have branches locally.

It also means that the application process will be carried out online, making it more straightforward for businesses. Applications can be made anywhere, at any time, without the need for physical documents or excessive paperwork. In many cases, this leads to a quicker decision, making the gap between application and receiving funding shorter. This will be welcomed by businesses who are in a rush to secure the finance they need for their mission.

4. There may be additional perks. Some alternative lenders now offer extra support in a bid to serve small business needs better and gain a competitive edge. Examples could include mentoring, guidance, networking opportunities and so on. By accessing this support, you can get helpful advice that shapes the running of your business, alongside funding, which improves your resilience and success rates.

5. A more comprehensive range of needs is served. As we have already mentioned, alternative finance provides options to risky and unconventional ventures while placing more solutions on the market for businesses to consider. By doing this, more companies should have access to financial support, including those rejected previously.

In this sense, the increase in alternative finance makes the lending market more diverse, enabling a wider variety of companies to get the funding they need for growth or survival.

This leads to a larger, healthier business population, under which more customers get the products and services they want, and market gaps are filled, helping to boost the UK economy.

What to consider before pursuing alternative finance

Although alternative finance has proven helpful for many businesses and continues to grow in popularity, you should still carry out your due diligence before committing to it.

Review all the options available to you, including those outside of the alternative finance umbrella. This will enable you to compare the solutions on the market and find one that offers the best solution for your business, aligned with your unique requirements and affordability.

You should also read the terms and conditions of any loan or equity agreement that comes your way, so you are fully informed before you sign anything and that no nasty surprises (like unexpected fees) come your way.

Finally, make sure that the funder you are working with is reputable. The alt finance sector contains many up-and-coming names that you may not have heard of before, unlike high street banks. This makes it harder to differentiate the genuine providers from those who may have penal terms or cause you more hassle in the long run.

You might look at the Financial Conduct Authority register, but this only provides you with a list of regulated funders, i.e. those regulated to deal with consumer finance. Numerous alternative funders are not regulated by the FCA as they chose not to be, since they don’t offer consumer finance. It’s also worth checking the website and reviews of the lender to see if they seem genuine, or perhaps even picking up the phone to have a conversation. If at any point in the relationship something seems off, be careful about how you move forward.

Conclusion

The rise of alternative finance is significant, as it marks a shift in the market away from the traditional options for business and towards more diverse and agile products. With this, more companies should be able to access the funding they need to reach their goals.

It will also force traditional lenders, like banks, to rethink their offering and introduce more competitive solutions to the market, further benefiting businesses seeking finance.

However, if you are considering alternative finance for your venture, it’s essential that you still make the necessary considerations and shop around to find the best fit. This will enable you to access support that fits your requirements – whether that from an alternative lender or not.

If you’re looking for funding for your business and have struggled with the traditional routes, alternative finance could be for you. Get in touch with our team to discuss your options and find the best solutions.