According to the latest statistics, the industry is set to be worth £20bn by 2020, but with more and more business owners turning to alternative lenders, what are the most suitable options for your business and how can you improve your chances of securing finance in 2016? 

Before kick-starting any application for funding, it’s important to get your house in order. Although lenders in the alternative finance market aren’t subject to the same legislative restrictions as the banks, this doesn’t mean they are willing to lend to every applicant.

Visionary

Finance providers will first and foremost assess whether the owner has a vision for the company. Although small and growing businesses may not have formalised this as part of any written document, company owners need to show they have a clear business plan in place.

It may seem obvious but presenting a clear case for why funding is required, shouldn’t be overlooked. Whether that’s just to fund working capital and cover company overheads or keep up with PAYE and VAT payments to HMRC or a much larger project, this is crucial. 

Use company assets

A general rule applies here – the greater the amount the company is looking to borrow, the higher the level of scrutiny applied by a lender. Business owners need to be prepared to show accurate future financial forecasts. For a small startup this may be overwhelming, however, most independent financiers will be appreciative that the company is still in its infancy. 

In this case, providers are simply looking for signs that the business is sound and there are other ways in which business owners can show this without an in-depth set of financial forecasts. This includes having a good sales pipeline and using invoices as assets to support a funding application. Again, this needn’t be extensive. If the company is looking to borrow more than £500,000, this is where business owners would need to show more extensive financial plans for the next one to two years at least. This figure is normally the threshold for most independent providers.

Create an attractive proposition

A good auditable paper trail is a superb way for businesses to show they are “finance ready”. Again, although this isn’t mandatory, finance providers will be more inclined to lend to those companies with sufficient ISO (International Organisation for Standardisation) accreditations – these are set of standards that businesses can seek for their paperwork. Such accreditations are used as a kite mark to show that business management and financial information is at a certain level and provides further peace of mind for finance providers. 

The majority of alternative lenders will do homework and carry out credit ratings, so any businesses that may have fallen into arrears with overdrafts or credit cards may find it difficult to secure finance. 

Read more on alternative finance:

• P2P finance exploded in 2015 as loans from Lending Works grew fourfold
• Challenger banks are best placed to meet the bespoke needs of UK mid-market firms
• Alternative finance is great to increase entrepreneurship  

What are the options?

There are a number of alternative finance routes companies may choose but it can be difficult to know where to start. It’s vital therefore that business owners do their homework – for example, by speaking to other companies or contacts in the industry, doing background reading as well as seeking the view of finance and accounting professionals. Here are some of the options explained: 

Peer–to-peer lending – P2P lending has grown in popularity as a form of lending for budding entrepreneurs and provides access to unsecured loans. Many of these lenders compete in an online space and are much more open to offering a loan to small start-ups based on a short-term risk assessment.

Invoice finance – Invoice finance is used by more than 44,000 UK businesses to fund working capital. Suitable for most established SMEs and growing companies, invoice finance provides businesses with the cash they need upfront, based on the value of any unpaid invoices, minus a small fee. This means that instead of having to wait anywhere between 30 and 90 days to receive payment for an invoice, businesses can unlock the cash they need straightaway. 

There are two types of invoice finance – “factoring” is where the invoice finance provider collects the money from customers directly, and “discounting”, which allows the business to handle all the correspondence themselves. 

Crowdfunding – Crowdfunding is similar to peer-to-peer lending in that businesses advertise their ventures in an online space and potential investors will express their interest via the platform. A variety of established crowdfunding platforms exist and depending on the provider, businesses may also be able to tap into specialist support in the form of sector knowledge or business management expertise.

Accelerator programmes – Ideal for early stage or start-up businesses looking for mentoring and support to get their ideas off the ground. Many accelerator programmes are government-backed initiatives that provide entrepreneurs with access to industry experts and match them with investors. In return for their specialist knowledge, individual investors will expect a share of the business in exchange for their involvement.

In summary, alternative finance providers are backing some of the UK’s most prosperous and growing businesses helping to stimulate the economy. There is a willingness to lend now more than ever, with banks also stepping up the support for SMEs to match those efforts. 

Being able to navigate the alternative finance market is a handy skill and it is those businesses that are equipped with the right tools that will ultimately see success in 2016. 

John Atkinson is the head of commercial business at Hitachi Capital Invoice Finance.