SMEs and Alternative Finance

By JackJune 30, 2016

– This article was last updated on 20 September 2021-

If you’re using ExpenseIn as your expense management software, you’re already ahead of the game as a responsible business owner, but almost every business eventually needs financing. Surveys indicate that a lot of small and mid-sized businesses don’t understand all the platforms now available in so-called alternative finance, so they don’t pursue it. But it could be just what the doctor ordered. What should you look for and how can you maximise your chances of getting funded?

The image shows a laptop with the words loan approved.

Seek Transparency

Most SMEs aren’t seeking something like a payday loan, but that type of mentality is starting to enter the alternative finance market. For one, thousands of small businesses have struggled with obtaining financing since 2008, which leads to both the need for alternatives but also unscrupulous types seeing that there’s money to be made.

Research a lender before applying and examine the terms very closely. Just as you would with a credit card, look for usurious rates, penalties for late payment, or other unfavourable conditions that could come back to bite you.

Peer-to-peer networks pool funds from businesses and institutional investors; Funding Circle, a UK-based P2P platform, lets borrowers see who their lenders are, and vice versa. This kind of transparency will be important to the long-term health of AltFi. Even in this nascent sector, try to find a platform with a track record and case studies of funded businesses.

Prepare for Takeoff

Some investors love that they are funding dreams and helping to grow small and mid-sized firms, but they are also looking for good risks. That said, these groups are willing to take a broader view of a company, looking beyond the balance sheet and business credit report. Here are some steps you can take to prepare a good application. These tips are applicable to companies that have been trading for 12 months or more (startup and incubation are a whole separate topic).

  1. If possible, have your accounts audited or at least examined by a chartered accountant – not all funders ask for audited accounts, but you will look your best if your financials are in order.

  2. Have your business and marketing plans ready, anything that will show the vision, planning, and personal investment behind your product or service. Remember that in peer-to-peer schemes, the investors are savvy businesspeople themselves.

  3. Be willing to sign a personal guarantee. Some lenders provide financing without collateral, but they want signed guarantees from one or more directors. They will be counting on your commitment to the success of your business.

  4. Apply before you think you might really need financing. Feeling desperate to keep your business afloat doesn’t create a good set of conditions for you or the potential lender; better to be seen as looking ahead to a time when you’ll need cash reserves or need equipment and resources in order to grow.

  5. Continue being transparent after you’ve secured funding. The emotion of seeing your business struggle can make you want to hide, but if you see signs of trouble, contact your lender sooner rather than later. If necessary, they may be able to sort out a new payment plan. Even if you don’t need immediate help, it’s good to signal that you are being honest and this could really help you in dealing with your account manager later on.