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Seven ways business funding has developed

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Things aren’t what they used to be. That’s particularly true in the world of business funding – everything changed in 2008, when banks hit the buffers and put the brakes on lending. Thankfully new methods of business funding have emerged to fill the void and help  businesses stay on track. Here are just a few of the recent developments in commercial lending:

 

               1.Crowdfunding.

Still on the rise, crowdfunding is rapidly becoming an important method of business funding for start-ups. In simple terms, a business idea will be proposed via a funding website and members of the public will donate as much or as little as they see fit, receiving an agreed return when the new business is launched. This is potentially risky for funders, as there have been high-profile stories of entrepreneurs failing to use the funds productively, but crowdfunding websites continue to generate a high level of attention.

 

               2.Peer-to-peer lending.

When banks won’t lend, the general public often will. Peer-to-peer lending websites match funders to projects, attracting capital by offering interest rates well above those of deposit accounts. Whilst lenders’ money does not enjoy the same level of protection offered by banks, the websites generally maintain large reserves to cover some or all of the shortfall if a borrower defaults.

 

               3.Specialist lending.

For small businesses in niche areas, bank loans are a thing of the past. With the big banks adopting increasingly cautious lending criteria, many companies find it easier and more productive to deal with small-scale and specialised lenders who focus on particular sectors. This trend towards specialisation is likely to become more significant in business funding as banks continue to retrench.

 

               4.Emergency loans.

When businesses hit a cashflow crisis, they need access to business funding – fast. Once upon a time, this would have been via a bank overdraft, attracting both significant interest and substantial fees, but this type of unsecured finance has become particularly difficult to obtain. Consequently, many businesses now turn to alternative lenders for emergency loans, which can be processed and paid in less than 24 hours.

 

               5.Asset-based finance.

Instead of securing finance on personal assets, which can be very risky, some entrepreneurs now use alternative lenders and secure their loans against their business premises, plant or equipment. Because the loan is secured, interest rates tend to be competitive – particularly as many lenders act as middlemen and secure the funds from a panel of financiers competing with one another for the deal.

 

               6.Invoice factoring and discounting.

For many business-to-business companies, this approach to business funding has proved a game changer. In simple terms, invoice factoring and discounting involves borrowing against the value of outstanding invoices – payment is made as soon as invoices are issued, with repayment occurring when the company’s customers pay up. But it is often difficult to know which is best for your business. With factoring, the finance company takes control of the debtor ledger and pursues repayment, whereas with invoice discounting the business retains control of its own debtors, who do not find themselves dealing with a third party.

 

               7.Microfinance.

Designed to address gaps in provision, microfinance services offer relationship-based banking to small and niche businesses. In some cases, these businesses deal with financial institutions as individuals, whilst in others groups of entrepreneurs collaborate to apply for business funding services on a collective basis.

 

If your business is encountering indifference from banks, this need not spell the end of your ambitions. As this article makes clear, there are numerous other ways to protect your cashflow, finance growth and invest for a brighter future.

 

 

Carl Faulds from Cashsolv offers advice and support to businesses looking to overcome cash flow problems and avoid financial distress.

 


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