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The alternative way to fund your business ambitions in 2017

With the alternative finance market now worth billions, Worldpay's James Frost says the time is ripe to look at the smart way to grow your business...

Last year we saw the alternative finance market grow to £3.2bn, with a range of new lending platforms entering the space.

However, there is still a lack of awareness among small business owners of the alternative options available to them.

Knowing when and how best to invest in your business is a crucial skill to learn if you want long-term success. Investment can take a lot of planning so it's never too early to start, but with traditional banks hesitant to lend in the current economic climate, for small and medium-sized business owners, securing funding is often a challenge.

Time to rethink ‘traditional' finance sources?

Even at the best of times, many small businesses worry about taking on debt.

Traditional loans often mean putting up the things you hold dearest as collateral, or sticking to a rigid monthly payment plan, even during unpredictable trading periods. That all-important annual percentage rate (APR) can come back to haunt you if you haven’t taken full account of potential fluctuations over the repayment period. Late and early repayment fees only add to the pain.

Before too long that short-term loan intended to grow your business might actually be undermining your financial security and future prospects.

Then there’s the question of choice. Businesses that do take the plunge and seek out finance have found their options limited. You go to the bank, present your business case, they make a decision on what you can afford to borrow, and set the terms of repayment. It’s a process that has barely changed in over a thousand years. There is nothing fundamentally wrong with the system – but it doesn’t work for everyone.

Research from the former department of business, innovation and skills shows that half of bank loan applications from first time small and medium borrowers are rejected, limiting ambitions they had to invest and grow their business.

So what’s to be done? A recent wave of innovation in the financial services sector is changing the way small businesses access finance. With it comes the promise of greater choice and flexibility for small businesses, not just in terms of whom they approach for funding, but how they structure repayments. Enter alternative finance.

Alternative finance explained

Alternative financing is the umbrella term for a new, technology-led approach to funding.

It ranges from peer-to-peer (P2P) lending (lending money to individuals or businesses through online services that match lenders directly with borrowers) to equity crowdfunding (funding a project or venture by raising monetary contributions from a large number of people, often performed via internet-mediated registries).

The UK has by far the largest online marketplace for funding, when compared with other European countries, valued at £3.2bn in 2015.

Alternative lending for businesses may have only started in the UK a few years ago, slightly behind the US market, it's rapidly catching up. Whilst the sector might still only account for 3% of all gross lending, it grew by a reported 75% to £1.26bn in the past year.

So, what’s driving this growth?

In part, alternative finance provides a level of choice and flexibility that many small businesses find is better suited to their business needs than traditional lending.

One model proving popular is the business cash advance, which offers small business owners an unsecured “cash advance” based on their future credit and debit card sales. It’s the route we went down with the launch of Worldpay Business Finance last year in partnership with Liberis.

Payments are made on the basis of a pre-agreed percentage of the business’ card transactions, so business owners only pay when they are earning and don’t face the stress of having to meet a regular monthly payment if business is quiet.

This flexible model of finance includes no fixed term and, unlike traditional “loans”, business owners will not face penalties for failing to make a payment. Furthermore, if the advance takes longer to pay off, the originally agreed payment costs remain the same.

This flexible approach to finance is particularly suited to businesses looking to invest over a relatively short period, either to make improvements, or to buy stock in advance of a busy trading period; a florist needing to get in a bumper order prior to Valentine’s Day, or a restaurant owner wanting to keep his customers happy during colder nights by investing in outdoor heaters. That extra cash injection can mark the difference between success and failure.

These examples are part of the reason alternative finance has gained traction so quickly. As we look back at the evolution that has occurred over the past three years, it is fair to say we are already some way along the path to an amazing transformation in the alternative lending industry. New lenders are giving small and medium enteprises rapid access to finance, helping them to invest and develop rather than threatening their growth.

Know what funding options are available to you

Despite the rapid expansion of the alternative funding industry however, awareness and understanding remains low. The treasury announced last year that only 3% of those rejected for a bank loan sought alternative options last year.

There’s work to be done to ensure all small business owners are aware of the options available to them when looking for investment, to give them confidence to plan for growth in the year ahead.

Having pushed the boundaries of the funding landscape, alternative finance is set to join the ranks of the mainstream in 2017, especially with the government’s new Bank Referral Scheme set to launch next year.

If you haven’t already starting thinking about investing in your business, the time to do so is now.

James Frost is the chief marketing officer of Worldpay


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