The Complete Small Business Guide to Alternative Finance

POSTED: 5th March 2014
IN: Guides

When recession hit the UK back in 2008, the traditionally loan-happy high-street lenders promptly shut up shop, leaving many of Britain's much-needed SMEs out in the cold.

As a result, in the years following the financial crisis, some badly-needed alternative finance solutions have muscled their way into the market.

However, although many of these solutions have now been round for a number of years, there is still an apparent lack of awareness amongst small to medium sized businesses. In fact, an awareness deficiency surrounding asset finance alone is currently estimated to be costing Britain's SMEs around £5bn in lost business.

The problem arises when businesses don't have access to sufficient funds to service business demands, and contrary to popular belief, this phenomenon actually hits businesses with a good product and high-sales the hardest.

So when your small business needs a cash injection, what are the options?

Peer-to-Peer Lending

Peer-to-Peer (P2P) lending is essentially an efficient method of moving funds from regular savers to responsible businesses that are in need of finance. Essentially it's an online matchmaking service for lenders and borrowers.

Basically, sole traders and small businesses that need to source funding for innovation can apply to peer to peer lending sites through a quick a simple process, during which they must outline their requirements and objectives for the funding. These sites cherry-pick borrowers to feature based on credit ratings and levels of risk associated with their business model. Then money savers on the hunt for a good return can pledge their cash to whichever initiatives they choose using an 'auction' process.

It's then up to the business to accept whichever loan suits them best and agree on a monthly repayment scheme. The repayments are governed by the P2P body, who act as a middleman between the lender and borrower to minimise hassle.


Crowd-funding is a relatively new concept in the UK and works by connecting online backers with would-be creators.

undefinedLike P2P lending, crowd-funding relies on a good idea with enough interested parties willing to raise the required funds. However, unlike P2P lending, backers of crowd-funded projects generally don't see a return on their investment - not a financial one anyway.

The idea behind this revolutionary gateway to finance is that lenders back projects that they would personally like to see come to fruition, whether that be a band raising capital for their next studio album, a crazy cat-lady with a vision, an aspiring film-maker with a killer script, or an ostrich pillow. In short, lenders get to experience the joy of being part of a success story. 

By its very nature, crowd-funding is best suited to inventors, who need funds to bring their ideas to life. The reason it works so well is because only interesting ideas with enough traction to garner the power of the people are likely to gain the support of enough backers to raise the required funds. For entrepreneurs with enough passion and drive to see their creations through, it is a cost effective way of gaining exposure and rich feedback that's a lot quicker than would be available from most forms of finance.

The trick for inventors is to develop a great idea, followed by a strong supporting campaign to match.

Asset Finance

Asset finance has been steadily growing in popularity in recent years for both the business and consumer markets. At the moment, it's most commonly used for things like car finance, whereby consumers can choose a car and pay for it in monthly instalments over an agreed period of time.

For businesses, asset finance works in much the same way. Basically, companies that need to make an investment in either equipment or machinery for the welfare of their business can do so through a lending arrangement with a selected provider. There are generally two ways these arrangements are drawn up: hire purchase and lease finance.

  • Hire Purchase: the lenders purchases the required machinery on behalf of the borrower, who agrees to pay them back in regular instalments until the value of the asset has been met and they can take ownership, or;
  • Lease Finance: the lender retains ownership of the equipment but allows the borrower to lease it for a specified period of time.

The third quarter of 2013 saw asset-based finance support over 43,000 businesses, advancing around £17.4bn in total. Of these businesses, over two-thirds are considered to be SMEs with a turnover of less than £5m, as this lending sector continues to drive the UK economic recovery.

To find out more about asset finance solutions, visit the Aldermore asset finance product pages here.

Invoice Finance

In the past, invoice finance has been commonly associated with ailing businesses looking for a last-gasp solution. However, in the past few years, it has emerged as a strong and reliable finance solution keeping small businesses to thrive through the turbulent economy.

The draw to invoice finance is that it provides a low-cost solution for SMEs who have plenty of work coming in, but have encountered or are in danger of encountering cash flow problems due to logistical factors that are not necessarily within their control.

Managing cash flow is one of the most common stumbling blocks for small businesses, and this is partly owing to the fact that when they invoice, they're completely at the mercy of their clients to pay on time. In fact, a quarter of small businesses report that they have experienced cash flow problems as a direct result of late payment, as the current UK late payment debt tips £30.2bn.

Invoice finance allows companies with outstanding payments due to unlock cash capital by selling their invoices to a lender in exchange for them releasing the cash. Like with asset finance, there are two potential routes for this: factoring and discounting.

  • Invoice factoring: a flexible funding and collections service by which the lender essentially buys your incoming invoices for a percentage of their value (typically around 85%), taking on responsibility for recovering the debt.
  • Invoice discounting: instead of buying the debt, the lender unlocks money from incoming invoices, but leaves the responsibility for the sales ledger with the borrower for confidentiality purposes.

Around 83% of invoice finance users are small businesses. To find out more, visit the Aldermore invoice finance pages.


If you know where to look, there are some great, genuine opportunities to get grants for those with a good business case. They're not easy to secure, with difficult application processes often clouding enthusiasm, but for those willing to persevere, grant aid is available.

Some of the most popular access to finance schemes are:

The Regional Growth Fund (RGF)

The RGF is a £2.6bn fund operating across England from 2011 to 2016, supporting projects that use private sector investment to create economic growth and sustainable employment.

Technology Strategy Board (TSB)

Businesses with an innovative idea that can demonstrate significant potential to stimulate economic growth in the UK could be eligible for the TBS's finance programme, which offers grants of up to £250,000 to worthy businesses.


GrowthAccelerator offers advice, support and funding to businesses ready for their next stage of growth. Run by a team of accomplished growth specialists, the organisation provides worthy businesses with a framework to build a winning strategy, discover routes to funding, unlock the business' capacity for innovation, and understand the potential of your team.

The Access to Finance branch of the scheme works to introduce small businesses to new ways of securing investment, providing support through the pitch process, as well as through expansion and movement into new markets.

Alternative funding providers are opening up opportunities for innovation and providing new ways for small businesses to move forward. However, no form of funding is a 'one size fits all' solution, so SMEs should be careful to weigh up the options available to them.

To find out more about alternative business finance solutions available from Aldermore, contact our team of expert advisors today.

 Image used courtesy of Tanaka Satoshi on Picasa.


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