Businesses are faced with a choice when it comes to funding; they can apply for a bank loan or look for less conventional forms of finance. With such a huge choice of business loans and the alternative finance sector booming, it can be difficult to know which path to take. So why are non-traditional finance solutions proving so popular? They are easier to access and often deliver faster payments than the banks. Yet both types of lending have advantages and disadvantages, so it’s important to understand the terms and with a greater supply of finance than ever before, choose what’s right for your business.
We’ve put together this useful short guide to the pros and cons of alternative finance options and traditional bank loans.
Because there are so many different types of alternative finance available, it is hard to group them all together and differentiate the pros and cons. However here are some general points to note:
- Speed and efficiency – applying for an alternative finance loan is quick and efficient compared to the long process at high street banks. If time is not on your side, an alternative finance provider can help
- Specialised providers – while national banks work with a wide variety of businesses, many alternative finance providers have specialisms. This means they will understand your business model and needs better than a general financial institution
- Tailored options – banks offer standard loans and commercial mortgages, while the alternative finance sector provides a range of solutions for all types of SMEs. Find something ideal for your finance needs, from asset finance to a merchant cash advance. You may also be able to benefit from flexible repayment options.
The main downside to using this type of funding is the higher level of risk. Instead of borrowing from a large financial institution which is fully regulated and protected, you will be lending from individual investors or a group. Also, the risk is high on the side of the investors which means interest rates can be higher with some products.
- Safe and predictable – a bank is the first point of call for many people to apply for a loan. It’s a safe place and you know the financial institution is accountable and credible.
- Fixed interest rates – banks have the power to offer slightly lower interest rates than other lenders for certain products, and fixed interest for the loan term. Some alternative finance providers will try and match the interest rates of the banks but it’s not always possible as it’s down to individual lenders.
While a bank loan seems like a great choice, the main con is that the majority of SMEs and start-ups will not be eligible to apply. There is a long application process with lengthy paperwork, and businesses usually have to be established and profitable with the support of historical accounts. To get a business bank loan you’ll probably also need strong credit and capital to secure the loan.
Want to find out more about your alternative finance options? Contact our commercial finance brokers today.