How Alternative Business Funding can plug gaps in company cashflow
When cash flow is unstable, many SMEs turn to other types of business funding. Whether to fund an expansion, maintain steady growth, or inject working capital into a business for a boost, banks and other lenders have a catalogue of options available.
Business loans take the top spot in terms of popularity, but there are a whole host of other funding choices out there. That’s because the lending landscape in the UK simply isn’t what it used to be. Fintech companies are producing innovative finance products, while older solutions such as traditional refinancing agreements that banks offer are benefitting from smart new tech integrations. With these in play, there’s an opportunity for SMEs to explore and understand the array of business funding they could potential access in 2021.
In this article, we’re going to:
• Define alternative business funding • Recap the popular types of business funding • Showcase some lesser known innovation in business funding
What is alternative business funding?
Alternative business funding simply describes any non-mainstream funding methods. Unlike, traditional, long-lived lending arrangements, alternative business funding solutions are often born out of innovations within financial technology. For example, a new digital platform could be created that shapes the way in which businesses can borrow, such as a P2P platform. Another example, could see an existing lender, such as a bank, reinventing their offering by using new software and developing a digital application process.
There’s also where funds are sources to consider. Traditionally, it was the banks that conducted the majority of lending. Today, the lending landscape includes a range of private online lenders, and even customer-driven P2P platforms. That said, not all business funding requires lending, and we’ll cover that below.
Traditional source of business finance
Secured business loans
In secured business loan, the lender offers an asset (such as a property or valuable piece of equipment) as insurance. These loan agreements typically grant access to larger lending volumes with favourable interest rates.
Unsecured business loans
No asset is offered as insurance in an unsecured business loan agreement, meaning there is a higher risk to the lender if the borrower defaults. This may result in more eligibility checks, lower lending volumes, and varying interest rates. However, this type of business finance is extremely popular.
Government or private grants
Grants are non-repayable sources of finance. They’re often set up by governments or other organisations for a specific purpose. For example, as part of a push to upgrade the UK’s fibre-optic network, a local authority may make a grant available to businesses that can install gigabit internet hardware.
Any business capable of delivering this service could apply for the grant, making them highly competitive, however, securing the grant money could be a huge win for the business that is successful. The government has made some emergency grants available to SMEs during the coronavirus crisis, while smallbusinesses.co.uk has compiled a useful list of 150 SME grants.
Alternative business funding options in 2021
Beyond the traditional methods above, here are some of the most innovative funding solutions for businesses in 2021.
The new way of invoice financing
You may be familiar with invoice finance , where a lender gives you the cash from your unpaid invoices ahead of time. But there is now an alternative. Utilising new technology, NatWest has created a product that integrates with your cash flow management software and allows you to choose which of your unpaid invoices you’d like to borrow against. It’s called NatWest Rapid Cash.
NatWest Rapid Cash could unlock growth opportunities for businesses that are wanting to move from success to success. It could allow SMEs to negate some of the downsides of traditional invoice financing, such as any bad reputation some of their debtors may have of the product.
We find that the traditional terms “invoice financing” and “invoice factoring” simply don’t fit NatWest Rapid Cash. It’s a tech-driven reinvention of the traditional invoice financing model, and could offer attractive benefits to small businesses. If you’re interested in improving your cashflow in 2021, you can read more about our funding method here.
Crowdfunding for SMEs
The UK’s crowdfunding market has exploded over the last decade and is now estimated to have a total funding volume of around £7.6bn. In a crowdfunding arrangement, small businesses use the internet to go directly to investors to find funding. This is also known as P2P (peer-to-peer) lending.
In these arrangements, borrowers go directly to individuals or lending platforms to source finance, as opposed to your traditional banks. One of the benefits of this funding method is that some businesses can get access to relatively low interest rates – sometimes around 6%.
Here, an SME could borrow funds via an online lending platform, such as GoFundMe. In this arrangement, there’s no guarantee that investors will see a return, so SMEs need to make a strong business case.
Debt-based crowdfunding
Here, investors pool money within a P2P lending platform, which then conducts its own set of analyses and risk assessment to make smart investments.
Reward-based crowdfunding
In reward-based crowdfunding, the very promise of a business’ success is the main incentive for investors to lend as they offer funds to businesses before any manufacturing or service provision has even begun – Kickstarter is a popular example. While seeming relatively high risk, this method can really help promising business that lack start-up capital get off the ground.
Internal financing
Due to the challenges created by the pandemic, many businesses may not be in a position to utilise the internal funding method in 2021. Whatever, the case may be for your business, it’s worth having on your radar, as it’s a powerful financing tool.
When internal financing, a business will use its profits as the primary source of investment to fuel the growth of a business. You essentially fund your company’s acquisition of new clients or gradual expansion purely off your profits.
This financing method obviously requires you to have stable profits. But if you are in such a fortunate position and don’t need access to funding immediately, this slow-burning method can be low-risk compared to external financing methods. Internal financing may be an attractive option to suit long-term, slow growth business models.
For more information on NatWest Rapid Cash and other funding options, please speak to your NatWest relationship manager or contact the NatWest Rapid Cash team on rapid@natwest.com.
See what NatWest Rapid Cash could do for you.
To be eligible for Rapid Cash you must be trading for more than 6 months, have an annual turnover of at least £100k and either be a Limited Company or Limited Liability Partnership in England and Wales. Additionally, you need to invoice other businesses and use one of the following digital accounting software: Xero, Quickbooks, Sage 50, Kashflow, Free Agent and Netsuite. Security and Guarantee required. Product fees may apply.
