What you didn’t know about alternative finance

In the wake of the 2008 global financial crisis, banks are still less likely to fund businesses with revenue of under £5 million. As a result, alternative finance solutions offer a more SME-friendly option.

When it comes to offering loans, traditional banks can treat SMEs with caution – perceiving them to be a high risk with the potential to reap low profits. In turn, many SMEs are getting increasingly frustrated with poor customer service, a lack of transparency in relation to costs and the inability of banks to understand the financial needs of their business.

The solution is alternative finance

Banks no longer hold a monopoly on small business lending, thanks to a range of alternative options – such as crowdfunding, factoring and invoice finance – that have been established in response to growing market demand for non-traditional sources of finance.

And these options are proving to be incredibly popular – allowing businesses to access vital growth capital without having to navigate complex terms and requirements. According to innovation charity Nesta, the alternative finance market has grown in terms of monetary value of loans, investments and donations from £1.7 billion in 2014 to £3.2 billion in 2016, and it shows no sign of slowing down – here’s why alternative finance is proving so popular when compared with traditional banks:

– Size isn’t a problem

Big banks might be opting not to work with small businesses that have revenue of under £5 million, but many alternative finance providers are more than happy to support SMEs and start-ups. In addition, traditional bank loans might have stricter requirements than alternative online lenders. For example – many banks will only lend to businesses that have been trading for at least two years, and require a formal business plan.

– Easy to apply
Applying for a bank loan can mean undergoing a time-consuming process of gathering supporting documents, submitting them and waiting for your application to be processed and a decision made. Today, alternative finance providers make it easy for small business owners to apply online – they simply upload their bank documents and other supporting information.

The need for speed

The rise of fintech has allowed alternative finance providers to offer a faster service compared with traditional banks – this is as a result of an investment in technology. Many business owners receive an answer regarding their application within 24 hours. Which is great for SMEs that depend on maintaining cashflow.

– Flexible services

Banks can be guilty of offering a one-size-fits-all loan that isn’t tailored to an individual company’s needs. Often the aim is to give the bank, not the business, the most security. On the flipside, online lenders tend to offer a range of solutions – including long-term and short-term loans, that are at a range of interest rates and for both large and small sums of money.

The unprecedented scale and pace of the alternative finance sector’s growth demonstrates that this is an exciting time for businesses, who are looking for the capital needed to grow their SME, and investors looking for opportunities.

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