The alternative finance sector is a fast growing industry. In 2012 it lent £267 million, in 2014 that had risen to £1.74 billion. The forecasts suggest that this will double again in 2015. MarketInvoice, one of the most established and biggest alternative finance platforms in the world, breaks down the different types of alternative finance:
Peer-to-peer business loans
These loans can secured or unsecured and are highly flexible. Transactions are debt-based and between individual investors and existing business. They are quick to get and are used for a variety of things including working and growth capital, buying fixed assets and one off expenses. You can get a decision in 48 hours.
Cost: between 6 and 20% APR
Amount: £5,000 – £3m
Peer-to-peer consumer loans
These loans are usually unsecured, debt-based transactions between individuals. They are commonly used for managing debts, home improvements and vehicle purchase, but also business growth. You can get your money within 48 hours.
Cost: £500 – £25,000
Amount: The cost ranges between 4.6% and 28.9% APR.
Peer-to-peer property finance
A new kind of mortgaged funded by the crowd, typically up to 75% LTV from 1 to 36 months. Most only lend against Buy-To-Let property.
Cost: 6 – 10%; facility and legal fees; some have early redemption fees (2-4%)
Amount: £100,000 – £5m
Online unsecured loans/direct lending
Used as an alternative to overdrafts, often used for buying high margin stock or bridging gaps in cashflow. This type of finance is very quick, funding can be advanced in minutes.
Cost: 2 – 2.5% per month, with registration fee. Interest can reach 26% annually.
Amount: Up to £50,000.
Merchant Cash Advance
These are loans based on annual revenue and follow a “pay as your earn” model. Businesses often repay as a fixed percentage of takings through their credit or debit card terminal. Particularly suited to retail, hospitality and ecommerce businesses; therefore, you pay back in line with performance of the company in a given month.
Cost: Factor Rate of ~1.3 against the sum borrowed.
Crowdfunding (equity-based) and Online Angel Investment
A very popular type of finance and one of the few suited started to start-ups and early stage businesses. As an alternative to traditional equity finance, crowdfunding can make getting funding for these types of business easier. It’s very important to prepare and pitch well as ~65% of pitches on crowdfunding platforms don’t get funded.
Costs: Initial fee of ~£250; 5% when funding achieved; admin fee of ~£1000 may be charged. There are no interest payments as investors receive equity as payment.
Amount: Depends on investor appetite but “sweet spot” between £100,000 and £1m.
A very flexible alternative to traditional factoring. There is no requirement for security and is very good for companies that are project based or seasonal (no requirement to fund the whole debtor book) and for those looking to grow. It’s also very fast, funds can be advanced within one working day.
Cost: Ranges between ~1 and 3% of the value of the advance and may go down the more a company trades.
Amount: No minimum or maximum.
If you’d like to find more about alternative finance, you can download the MarketInvoice Guide to Alternative Finance here.
This piece was written by Piers Garthwaite from MarketInvoice, the leading online invoice trading platform. They offer fast, flexible cashflow solutions to help businesses grow. If you’d like to find out more, visit their website or give them a call on 0845 548 0508.