The Different Types of Alternative Business Finance and How To Find the Right One

Posted on 18th October 2023

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By Chirag Shah, founder and CEO of Nucleus Commercial Finance and Pulse.io

In the business realm, growth can be the difference between making it and falling at the first hurdle. However, one thing that most entrepreneurs struggle with is trying to fund such scaling up. When it comes to traditional business finance options, there are either several challenges to navigate or a series of delays to be patient with – both of which can hamper a business’ momentum and bottom line. The key to it lies in timely access.

This is where alternative finance comes into play, and over the past few years, we’re seeing it as an increasingly favoured solution for businesses of all sizes. Often side-lined by mainstream financial organisations, alternative financing provides businesses with a quicker and more streamlined approach to the money they need, with often much fewer hurdles. What’s more, it helps businesses to better manage their cash flow while setting more flexible terms.

Alternative financing is vast however and includes the likes of peer-to-peer funding and even crowdfunding. All types of alternative financing have different needs and unique advantages – and ultimately understanding each one is key to its success. Here, we break down the most common types of primary alternative financing options.

Asset Finance

This type of finance is when a contract outlines an agreement whereby an asset is purchased over a designated period. This includes hire purchases, asset refinancing and leases which allow businesses to lease or acquire essential equipment. One of the biggest benefits of asset financing is that cash flow is improved, and costly interest rates are avoided.

Invoice Finance

In this situation, a lender purchases a business’s unpaid invoices, providing immediate cash flow for the business. The lender then takes control of the unpaid invoices, setting up repayment plans. Invoice finance not only allows businesses to unlock crucial funds from unsettled invoices but ensures swift revenue access. Within invoice finance, there are two specific types: invoice discounting and invoice factoring.

Property Finance

This is when a secured loan is taken out, using commercial or residential property. It offers a more flexible approach to conventional bank loans, even for businesses with limited assets.

Unsecured Business Loans

These loans are also known as term or cash flow loans and offer asset-less companies or those who don’t want to leverage their assets the opportunity to gain funds. It’s typically risk-free and contract agreements focus on the loan amount, interest rate and repayment plan. This lasts for anything from a few months to a few years.

Peer to Peer Lending and Crowdfunding

Peer to peer lending is when online investors pool together to find resources for a business, ensuring growth and interest earned. In contrast, crowdfunding is when groups come together (often including individuals) to fund projects or businesses in return for equity or rewards.

So, which is best?

It’s important to note that the best type of financing for your business will depend on your unique needs and circumstances. It’s important to consider the amount of funding required, how quickly you require it, payment terms, interest rates and how long you require it. Often, it can be wise to consult an independent financial expert to help you weigh up your options. Either way, for those businesses aspiring to grow, alternative financing can be invaluable. However, the trick lies in finding the right funding mechanism for you.

Chirag Shah, founder and CEO of Nucleus Commercial Finance and Pulse.io has over 20 years of experience in the financial services industry and a deep understanding of the needs of UK SMEs.

In 2011, he founded Nucleus, a leading alternative finance provider, to offer flexible and tailored solutions for SMEs across various sectors and stages of growth. With an understanding of the challenges that UK SMEs face in the current economic climate, Chirag launched Pulse in October 2022, a free-to-use service that helps businesses and accountants gain insights into financial performance with AI-powered data visualisation and personalised dashboards. Chirag is not only committed to driving growth and innovation in the UK business ecosystem, but he’s also helping SMEs better understand their data to boost their profitability and guide them towards success.