Here, commercial finance director at peer-to-peer lender RateSetter, Paul Marston, gives Business Advice readers the lowdown on the current alternative finance landscape, and how small businesses can get the most from it.
If you’re considering borrowing money, whether that’s to grow your business, take on new projects or just for working capital, you’re in good company.
According to Federation of Small Businesses (FSB) research, one in seven small business owners applied for credit in the last quarter of 2016 alone.
However, as anyone who’s ever applied for a business loan will tell you, the process can be opaque and demanding.
A good place to start if you’re new to this is the Business Finance Guide, put together by the British Business Bank (BBB) and the Institute of Chartered Accountants in England and Wales (ICAEW).
It has a good overview of the options, and because it’s written by an impartial body, the information is unbiased. Importantly, it also considers modern funding options, such as equity crowdfunding and peer-to-peer loans.
That brings us on to the big issue of alternative finance. These new platforms were almost unheard of five years ago, but from a humble start, they’ve now provided billions of pounds of funding to small businesses.
There are essentially two forms of alternative finance – equity crowdfunding and peer-to-peer lending. Businesses who use equity crowdfunding platforms give up a proportion of their company (effectively selling shares) in exchange for investment.
Peer-to-peer loans, on the other hand, are similar to what a bank offers – you’ll get a loan for a defined amount, and make fixed repayments for a pre-agreed term.
So which is right for you? As a general rule, if you can afford to repay a loan (which means that you’re generating revenue and consistently turning a profit) then a loan could be a good way of securing funding without giving up any ownership.
What makes it different?
Alternative finance lenders are much smaller than banks, and can often be more focused. Because they’re smaller, in some cases, peer-to-peer lending platforms can afford to take a more detailed look at an individual business, and are generally much quicker to get back with an approval or a decline. RateSetter ususally provides an agreement in principle within two days and funds within two weeks if the application is successful.
There’s also an interesting quirk of the industry which is that many ex-bank staff have made the leap over to peer-to-peer lending platforms over the past few years. RateSetter has employees from some of the largest high street banks.
What about your bank?
One concern that small business owners sometimes raise is whether using an alternative finance platform can harm their relationship with their bank.
It shouldn’t. In fact, most businesses use different banks for different purposes – for example, you might do your day to day banking with Lloyds but have a loan from HSBC. There’s no reason for a bank to object to – or even feel left out by – you using a different provider.
By way of example, before working at RateSetter I was at one of the UK’s largest banks, and worked with hundreds of small businesses looking for finance over the years. In that time, I never looked negatively at businesses shopping around for credit.
In fact, it is a positive indicator, as looking at all your options and using the most appropriate providers is a good sign that a business is being well run and management are being proactive.
What should I do next?
There are now more options than ever before to fund your business, so bear that in mind and shop around. By considering all the options available to you, you’ll ensure that you get the best possible deal.
Paul Marston is managing director of commercial finance at RateSetter.
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