A report last month claimed that UK businesses would raise over £1.1bn from alternative finance providers in 2014. This is roughly three times the lending volume of 2013 and indicators suggest growth in this sector will continue to accelerate.
Like all business finance, alternative finance can be split into debt and equity funding. I’m going to focus solely on debt funding here, mostly because it vastly outsizes the equity sector: of the £1.1bn, over £1bn is debt-based finance.
So what is ‘alternative’ about alternative finance?
In some ways, alternative finance isn’t all that different from traditional finance. Businesses get a sum of money up front in return for the promise of paying slightly more back by a specified future date. It’s a loan, and the basic premise won’t change. However alternative finance models offer a series of significant benefits to businesses.
If you compare doing business today to just 20 years ago nearly everything is significantly faster, from communicating with colleagues across different locations, to customer outreach, to researching market information. One thing which hasn’t gotten any quicker is bank finance – it still takes up to six weeks to get a loan. The proliferation of alternative finance should mean that in a few short years it will be unthinkable to have to wait weeks on end to hear if a loan application has been accepted. Alternative providers use technology to build automated credit scoring systems meaning they are working at a speed which reflects the reality of modern day business. With the increased amount of data available online, there is no reason for a business to have to wait more than 24 hours to be accepted (or declined) for finance.
Simplicity and transparency
Standard contracts for bank finance run to many pages; for traditional invoice finance up to 45 different charges can be applicable. No busy business owner has the time to get to grips with these pricing arrangements. For too long traditional finance providers have obscured the full terms of finance through long and complicated contracts. A common theme across alternative finance is simple, transparent pricing. At MarketInvoice we don’t do long contracts with break clauses, which means you can leave whenever you want. This alignment of incentives is important, as a business you can be confident you won’t be stung by hidden fees, because if you were, we know you’d never use the service again. Most leading alternative finance providers offer simple online tools to show how much you will be charged dependent on your terms.
A common misconception about alternative finance is that the only difference from banks is in the product. What people often miss is that alternative finance isn’t just about new products, it’s also about better service. When I speak to business owners often their biggest frustration with banks has little to do with the products on offer, and a lot to do with the service. From the time it takes to get an appointment, to more nuanced elements like the way a bank makes you feel about asking for finance.
Most alternative finance providers are run by entrepreneurs, this means they have a natural propensity to understand the concerns and aspirations of small business owners.