Finance 20 January 2017

There’s a big alternative finance market out there, but can I trust it?

There are now many more finance options for earlier-stage businesses
There are now many more finance options for earlier-stage businesses
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, theyve now provided billions of pounds of funding to small businesses.

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?