Alternative finance offers a new solution to traditional small business finance such as constrained access to lending, higher productivity costs, training staff, managing legal and regulatory requirements which put an enormous strain on the companies resources.
Australian small businesses account for 95% plus of companies and employ over 70% of the population. However, they face increasing challenges to operate competitively in the globalized technology driven world.
Since the GFC, it’s a well-known fact that banks have tightened their lending criteria and this has made it more challenging for small businesses to fund their growth. Whether the business is seeking finance for company expansion, filling a seasonal cash-flow gap, or investment into innovative products and services, the business owner had to look at alternative finance as a source of capital.
Alternative Finance for Small business
Over the past decade, alternative finance has enjoyed accelerated growth as its fast becoming the go-to place for business loans. Local and global alternative lenders provide invoice discounting, merchant cash advances, peer-to-peer lending, crowdfunding and online business loans. These alternative loans have expanded across the SME landscape, as traditional banks have turned these businesses away.
There is a clear preference for business owners to protect their asset and seek out unsecured business loans. Getting the overdraft applications approved is getting tougher, and many businesses had their credit limits downgraded or completely withdrawn.
So what are the pros and cons of Alternative Finance?
Alternative finance can provide many benefits to businesses with speed, simplicity and flexibility terms and pricing as the prime benefits.
Its popularity and interest to new business owners who have insufficient financial history and or collateral do not qualify for traditional loans.
The unsecured loan products of alternative finance are very attractive to new entrepreneurs. They believe if the business fails, the lender absorbs the loss. The business virtually files for bankruptcy and walks away.
However, Directors of the bankrupt company could also be personally liable for the business debt if they agreed to a personal guarantee with the alternative lender. In most unsecured lending models, additional insurance through personal guarantees is required to pay back the amount owed.
Company directors need to understand that because the borrowed money is through the company, the debt won’t disappear if the company went bust. Only in bankruptcy would this scenario occur.
It is important that business owners are aware of the cost of alternative finance. Good cash flow management must be addressed rather than grabbing instant funding at a high price. The business may not be viable, or the business structure could have flaws that need fixing.
What is the next alternative finance trend?
- Peer-to-peer lending platforms where cashed up individuals or funds offer secured and unsecured loans through online services that match lenders directly with borrowers. Most peer-to-peer lending companies offering these services operate entirely online. Their overheads are lower and can provide this service to a broad customer base across multiple locations.
These platforms are similar to crowdfunding channels where one or multiple investors can fund your business.
- SME Bonds are an alternative source of financing for established and early-stage companies. They operate as a hybrid debt / equity instrument that provides a direct and cost-effective way for businesses to access seed or growth funding. An SME Bond merges some elements of a Corporate Bond and a Promissory Note.
- ResiBonds are tailor made for small-scale property developments for land acquisition, fund refurbishments, or working capital for stage one construction. These debt securities can be secured or unsecured an offer medium term investments with monthly or quarterly interest payment until maturity.
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