As a small business, access to finance is important for your continuing growth. Due to the rise of digital technologies, open banking developments and the fast growth of alternative finance, there are now a wide variety of funding options available.
Funding via banks or alternative lenders.
Traditional high street banks have improved their loan offerings to SMEs; however, their offerings are still limited by their low risk appetite, causing SMEs who have recently begun trading and businesses with a poor or limited credit history to lose out on funding.
Alternative lenders may provide more choice and flexibility in regard to funding business loans to those with a poor or limited credit history, new businesses and businesses in new and developing sectors. Such lenders are typically more attuned to using open banking API data and company house data to access portable credit files - using references to revenue, gross sales, business performance, business reputation and cash flow projections to inform their lending decisions.
What happened in the last 12 months? What were the 4 most popular SME funding options?
We asked our partner Finpoint to help compare funding options and share some new trends.
In general, in 2021 there was an increase in SMEs requesting alternative funding that adapts to their growing business and scales up with them.
1. Merchant Cash Advance
A Merchant Cash Advance is a great option for businesses that use their card payment terminal for day-to-day transactions. It is a flexible loan option that hinges on repayment being established through an agreed percentage taken off future processed card payments from the company’s card payment terminal. A Merchant Cash Advance allows the company to control how much it pays back. The loan adapts to the company’s trading patterns and card terminal transactions - the busier the day, the more it pays back on its loan.
Merchant Cash Advances can be easier to obtain than traditional funding options and businesses that have been rejected for other types of funding may still qualify for a Merchant Cash Advance. They are popular within hospitality, retail and other customer-facing sectors and are becoming increasingly popular with sole traders.
2. Invoice Finance
Invoice Finance is becoming increasingly popular with SMEs as an alternative funding source, offering more competitive loan terms than historically available and can be effectively used as a form of revolving credit. With Invoice Financing, a company does not need to provide collateral or a personal guarantee, as the unpaid invoices are the collateral. Invoice Finance can be used across a company’s entire sales ledger or the company can select the invoices it wants to use to finance its loan.
Invoice Finance offers a chance for businesses who are struggling to balance their books against late payments to right themselves and get back to business as usual. For example, Finpoint’s Invoice Finance lenders can offer up to 95% of the value of invoices in a matter of days.
3. Secured Business Loans
Secured business loans require the business to put up collateral against the loan i.e. business assets, such as business equipment or property. If a company fails to repay the loan, the lender has the right to seize the asset. Secured business loans are thought to be less risky to the lender as they ensure the lender will recoup payment through the company’s assets if it is unable to pay back the loan. Sometimes lenders may require a director’s personal guarantee as an additional form of security for businesses with poor credit.
4. Unsecured Business Loans
An unsecured business loan offers faster funding than secured business loans, but the loan amount offered is typically less over a shorter repayment period with higher interest rates for SMEs with a poor or limited credit history. With an Unsecured Business Loan, a company does not have to use its assets as collateral, but as the lender has no security via assets, credit history, or business profile (trading history, revenue, cash flow, etc.), it may apply stricter lending criteria.
Would you like to know more about Finpoint and its services?
Finpoint is free to use for businesses and its mission is to make sure any SME can get the right business finance. It is transparent about its fees and rates, and gives access to the UK’s largest panel of business lenders. Apply Now