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Writing for Business Advice, financial director at Nucleus Commercial Finance, Simon Willmett, explains the ins and outs of alternative finance.

Alternative finance simply means any form of finance aside from a mainstream high street bank loan. There are many different kinds of alternative finance, from cash flow loans to invoice finance, for small and larger businesses, in all industries.

Alternative finance can help businesses with everything from managing their day-to-day operations, accomplishing large equity or venture capital deals or delivering larger scale projects.

However, according to a House of Commons report on access to finance for small businesses, the main barrier seems to be a lack of awareness among SMEs, and a lack of understanding on how these solutions might meet the needs of a new or growing business.

Around 71 per cent of businesses seeking finance only ask one lender. If rejected, many simply give up and do not seek alternative options.

Last year, 220,000 small businesses asked for a bank loan or overdraft. Of these, 25 per cent were initially declined and of those, only seven per cent were referred on to get finance from other sources.

How can a small business find the right sort of finance?

Educate yourself on all the options available to you – this is always the best way to empower yourself. If you do not have a lot of experience or lack confidence then a good independent broker can be worth their weight in gold.

They will know the market, they will know the products out there, taking away a lot of that initial pain and stress. 

What sort of projects can alternative finance be used for?

In terms of what it is used for, alternative business finance offers the same as traditional forms of finance. It can be used for all types of projects to do with your business.

Common uses include smoothing bumpy cash flow where a big order has been received, or for short-term working capital boosts like a tax bill that has come up unexpectedly and has not been provided for.

It could be used for a large scale new project like wanting to expand, undertake renovations or open new premises or even the merger and acquisition of another business.

What will alternative funders expect to see?

It depends on the type of finance a company is trying to obtain. If a business is looking for a cash flow loan, a lender might look for three years’ worth of trading, the latest sets of filed accounts and bank statements.

If we are looking at a larger loan or facility, we would want to see more in-depth, granular financial and management information. We would also look at business assets for secured loans – it really does depend on the type of finance. Generally, we are looking for the three key financial statements (cash flow forecast, balance sheet and profit and loss account).

If the finance was for a company turnaround then we would really want to see robust models and projections as we get into the larger deals. We want to see that the company can repay the money that they are borrowing. That’s obviously important for both parties.

What sort of things should a pitch for funding include?

You should be able to sit down and be very clear about what you need, how much you need and why. Make sure you can say “I need “X” amount of money for “X, Y and Z”.”

For example, if a business comes to a provider and says they want £100,000 to £200,000, that is not ideal. A big range like that might appear to show that the financial planning has not been well thought out.

If they have not done their research, and if they do not know what they need the money for, how can we be sure they can repay it?

What should you expect from an alternative cash flow loan?

Cash flow is the lifeblood of any business. If you are looking for cash flow funding, you should be able to expect quick and easy access to funds, and it should be flexible and fit for purpose.

At Nucleus, we can pay out on the same day if we have the right information available from the customer at the start.

Because they are one-off loans, there is less of an ongoing relationship with the provider and you need to know from the outset that the loan is right for you, the rates are right and you can repay it.

What sort of things would an alternative funder see as a warning sign?

We look at a company’s history and do credit checks, looking out for any missed payments or a history of bounced direct debits, those things might make you question the business’ ability to repay.

We also check to see if there are any debts outstanding to other lenders. If there are three or four other finance providers or a lot of short-term borrowing already that can suggest a business is struggling to manage their finances effectively.

What advice do you have for small businesses looking for alternative finance?

Make sure it is the right product fit for your business and the right lender. There are a lot of people out there now willing to lend money, but some of the rates are extremely high. Do your research, listen to testimonials and references and shop around.

Bear in mind that the best lender might not always be the cheapest. A small business seeking finance needs a good relationship with a lender – a partnership – so that, if there is a bump in the road, they can work it out together.