It’s no secret that it’s becoming increasingly tough for small businesses to raise capital from traditional lending routes. But there are other ways for businesses to borrow. Colin Swanston, Managing Director of the Transport Division of Close Brothers Asset Finance, discusses a range of alternative finance options and ‘runs the rule’ over each of them.
According to the most recent Close Brothers Business Barometer survey, 66% of Scottish businesses are unaware of the alternatives to traditional funding when it comes to funding outside of traditional banking; nationally, the figure isn’t much better, coming in at 59%.
These figures are perhaps surprising given the amount of press focus on the likes of crowd sourcing; peer-to-peer lending, and challenger banks.
1. Asset finance Asset finance allows you to take advantage of your existing equipment to fund everything from paying a deposit on new equipment to unlocking working capital to ease cash flow. There are a number of products under the banner of asset finance:
- Hire Purchase enables you to acquire an asset while paying for it in instalments over an agreed timescale. At the end of the term, you have the option to purchase the asset outright
- Refinancing is a quick way to access the value of assets on your existing balance sheet and redeploy that value elsewhere within your business
- Sale and HP Back works by the funder purchasing the asset and financing it back to a business. This option applies whether you already own the asset or are using it under a finance deal with another provider
- Finance Lease lets you use the equipment you need without having to buy it outright. You pay the funder rent for the full use of it
2. Invoice finance
Invoice finance allows you to unlock up to 90% of the value of your unpaid invoices the moment they are raised, removing the concerns many small businesses have about getting paid on time, which in turns keeps the cashflow healthy. Typical products include:
- Discounting - releases funds from your unpaid invoices to help manage cash flow, while you maintain responsibility for collection of payments.
- Factoring - releases funds from your unpaid invoices, while a credit management team looks after collection of payments on your behalf.
3. Financial technology services
Almost all businesses rely on technology to some extent and the disruptive nature of FinTech is a welcome challenge to traditional lending and financial services, and is forcing conventional financial institutions to evolve.
However, staying in touch with developments and developing a tech-savvy culture can be both time consuming and expensive. In line with asset finance, the funding options are broadly similar, but because of the nature of technology, the process is different and reputable funder will help you along a four-step process:
- Acquisition: work with you to source the technology – from hardware to software – that is appropriate for your business
- Funding: select the right funding option or options
- Management: help you with, for instance, the installation of new and removal of old technology. They should also be able to help you track your assets if you have a mobile workforce
- Recovery: take care of the disposal of technology in an environmentally responsible way and ensure your data is secure at all times.
4. Peer-to-peer lending
Sometimes abbreviated, P2P lending is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. This makes up a very small percentage of the overall market, and is typically for small amounts.
Colin Swanston is the Managing Director of the Transport Division of Close Brothers Asset Finance based in Scotland. For over 30 years Colin has specialised in providing alternative asset funding to the Scottish SME Marketplace.