Bootstrapping your small business will only get you so far: if you have big dreams and want to grow you are probably thinking seriously about funding options.
Have you tried looking at alternative finance? It’s more likely you’ll get a loan with criteria and terms to suit your business through alternative finance than by approaching a bank.
To give you an idea of what is possible, we asked Henry Audley-Charles of SMEfunding.uk and we’ll share his wisdom in a few easy to read read blogs.
What kind of finance do you need?
This post will cover alternative funding solutions ideal for …
- a small business with less than 2 years trading history or with a low business credit rating
- and looking for a medium term loan (e.g. 2-5 years) for equipment purchases, hiring staff or other business expansion costs.
If this isn’t you we’ll be blogging about finance options more suited to other situations in the rest of this blog series, see the end of this post for details.
Secured loans vs unsecured loans
Unsecured loans through a platform like Funding Circle are probably the best known form of alternative finance. However, with insufficient trading history or a poor credit rating your business may be either ineligible or facing far higher interest rates than you can afford. A secured loan may be more appropriate. Two possible options are:
1/ Finance against a residential property
With a typical loan term of 2 – 5 years this is ideal for financing a start-up or planned expansion of a small business. Some lenders will roll the interest so that no repayments have to be made during the term. This gives you time to build the profitability of your business before you need to repay the loan.
The loan is secured against a residential property you own (either your home or a buy to let investment property), so lenders will be able to offer you lower interest rates than they would for an unsecured loan. As you’d expect, your residential property will be at risk if you cannot keep up with the agreed repayment schedule.
2/ Asset finance
If your business needs a short term loan then asset financing may work. It’s possible to borrow against an asset you’re buying or against assets you already own. In each case, as you would expect, the assets used as security are at risk if you cannot keep up repayments on the loan.
Through a specialist broker you may be able to fund assets that usually difficult to finance like older second hand vehicles or office refurbishments.
Get the right finance
If you decide to seek alternative funding to grow your business, we strongly recommend you seek independent advice from an experienced and ethical broker.
The optimum solution differs from client to client, according to their specific business needs and their situation as a business owner; therefore a loan may not be the best option for your situation. If you decide to look at funding options, an ethical broker will help you to get the right funding, on the right terms for your business.
We’d like to thank both Henry Audley-Charles, Director of SMEfunding.uk and Richard Reuss, Director of Mortgage Plus who we know through our monthly ICB branch meetings, for sharing their time and knowledge for this blog post.
We’ll also be writing about other alternative funding options, suitable for different business situations, over the next couple of months or so.
Blog posts in this series:
- Alternative Finance blog #1 Secured loans: medium term finance for young small businesses or those with a poor credit rating (this post)
- Alternative Finance blog #2 Unsecured loans: longer term finance with flexible terms for more established small businesses.
- Alternative Finance blog #3 Invoice / Supplier finance & Merchant cash advances: Short term borrowing to increase cash liquidity for a small business – coming soon.
- Alternative Finance blog #4 Funding for start up businesses – coming soon.
- Alternative Finance blog #5 Director’s pension loans: tax efficient lending option for small businesses – coming soon.