There’s a big alternative finance market out there, but can I trust it?
Alternative finance 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 youll 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 hasemployees 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, youll ensure that you get the best possible deal. Paul Marston is managing director of commercial finance at RateSetter.