Alternative finance

Alternative finance solutions have become more and more popular — especially for small businesses.

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What is alternative finance?

Alternative finance refers to a number of products, that have developed outside of conventional banking and capital markets. Alternative funding has allowed businesses to gain access to new ways of financing their operations — where they may have had difficulties before.

‘Fintech’ is the ecosystem within alternative funding — made up of companies, technology, and processes that seek to improve conventional means of finance — in categories such as: equity finance, business loans, insurance and much more.

Alternative finance has made raising funds both easier and less time-consuming.

Alternative finance — considerations

Another way to describe alternative financing is — any form of business finance that does not come from a traditional bank. Getting financing from banks is great, for companies that qualify. But for other, mostly smaller businesses, bank lending criteria are often hard to meet.

Alternative finance has brought innovative products and new ways of thinking to business borrowing. Alternative funding providers typically operate digitally (think fintech), through the internet, offering loans and equity financing — in unconventional ways.

The application processes are streamlined — without the endless paperwork. Repayments are flexible, rates are competitive and you can get the funds — with little, to no trading history.

There are variety of alternative finance lenders in Nigeria, and the numbers continue to grow. Together, these lenders are able to accommodate your business financing needs — when banks cannot.

Like with conventional finance, alternative funding can be used for several different purposes including — investing in new premises, purchasing machinery, buying stock or helping with general working capital.

Alternative finance lenders source their funds from both institutional investors, and retail investors (individuals). With alternative finance, these investors are given more investment choices — enabling them to generate better returns — than keeping money in the bank. It also gives investors the ability to generate income — based on their risk appetite.

This gives borrowers (businesses), access to funds that cannot be easily obtained — through commercial banking.

How does alternative finance work?

Companies seeking alternative finance, would need to identify exactly what they need the funding for. Based on your needs — you will then be able to source an appropriate lender.

Most applications begin online, where you would give some basic details on your business — its trading history, cash flow and assets. Using this information, lenders will assess your eligibility for financing. Should you meet the lending criteria, funds can be advanced to you in a matter of days — with future repayments tailored to your needs.

Given that alternative finance includes multiple products — the lending requirements vary. This is the prime reason why its important you are specific — when it come to your funding purpose. As a result, you’ll be able to apply for the most suitable form of finance — where you are more likely to get approved.

Types of alternative finance

Crowdfunding is an increasingly popular form of alternative finance. It works by pooling small amounts of money, from a number of individuals (the crowd), until you reach your funding target. In exchange, the “crowd” or investors are paid back with rewards, or given shares in your business/venture.

Peer-to-peer lending, also known as p2p or crowdlending, allows people to directly lend their own money to businesses — in return for agreed interest rate payments.

Direct lending, also known as private debt or private credit, offers debt products (commonly loans) to companies — without intermediaries such as banks and brokers.

A cash flow loan is among the simplest ways of getting cash into a business. It can be used to manage expenses and pay for short-term projects i.e. it can bridge a cash flow gap.

Merchant or business cash advances, are available to companies that accept card payments. The funds advanced to you, are based on your monthly card transaction turnover. A percentage of future card sales are then continuously taken — until you have repaid the monies lent to you.

Businesses in good health and in good financial standing — may be offered a revolving credit facility. This is a fixed credit limit — similar to a business overdraft. Alternative finance providers, typically have more flexible eligibility criteria.

Revenue-based financing (RBF) is a way for SMEs and startup companies to raise funds for growth. It lets them “sell” a portion of their future revenues — in return for a cash advance.

Venture capital (VC) provides your company with a long-term monetary investment — in exchange for equity in your business/venture. This money is usually only available for businesses that have or can demonstrate potential for rapid growth — where any risk to the VC is offset by potential future profits.

Angel investors are people that offer business or ‘seed’ capital — in exchange for equity in the company/venture. As well as funds — angel investors may offer mentoring and help with networking.

For businesses about to start, or less than a few years into their growth — some alternative finance providers offer startup loans. These are usually reserved for companies that can demonstrate viable business ideas — with plenty of cash flow.

Unsecured business loans are appropriate for companies looking for funds to grow and develop — but who do not want to give up any equity. Instead of collateral, some alternative business funding providers would require personal guarantees — while others may want to see proven cash flow.

If your business requires a lot of funding, in the form of a high-value loan, security or collateral will often be required. As long as this is provided — many alternative finance providers do not look to hard into credit ratings and business financials.

Microloans are available from alternative finance providers like — micro-lenders and non-profit organizations. As the name suggests, the sizes of loans offered are normally small.

A mini-bond is essentially an IOU issued by a business (the issuer), to an investor — in return for interest payments over a set term. At the end of this term, borrowed money is repaid in full.

This type of lending facility is suitable for firms that issue invoices to customers. Essentially your invoice can be sold, online, to an alternative funding provider — who will buy it at a discount (and chase payment)

Raise funds based on existing assets you own, rent equipment over a period of time, or buy an asset and pay in installments — refinancing, leasing and hire purchase respectively. Alternative funding allows you to finance a range of assets — in a number of different ways.

Getting funds for acquiring property, or real estate development can be difficult. However, there are many alternative finance solutions that can help — such as joint venture finance, mezzanine financing and bridging loans.

Several new trade financing houses have begun operating in the market. These companies allow businesses to trade overseas — importing and exporting goods.

In forfaiting, an exporter sells its claim to trade receivables (money importers owe the exporter) to a financial institution (the “forfaiter”) and receives payment instantly.

Supply chain finance is a funding solution that helps both buyers extend payment terms and suppliers get paid sooner.

Purchase order finance is cash advanced to a supplier — secured against a confirmed purchase order (PO) . It allows businesses to receive stock/goods — before having to pay for it directly.

Stock finance allows companies to release funds against the value of stock — improving their cash flow.

Trade credit is an arrangement, between buyer and seller, to acquire goods and/or services without paying immediately.

Contract financing lets companies receive a cash advance, on work yet to be performed. The contract between a business and a customer serves as collateral.

Islamic loans offer a means of borrowing money — without paying interest on repayments. Instead, profits and losses are shared. It is a growing way of business funding in Nigeria.

Startup accelerators are short-term programs that established startups may attend — to accelerate business growth. As part of these programs — seed investment is often offered. Accelerators are suitable for businesses with minimum viable products and specified customer profiles.

A business incubator is an organization that assists new and startup companies, to develop, by providing services like co-working space and business training.

Benefits of alternative finance

  • Easier access to finance
  • Funds can be released quickly
  • Flexible repayment options
  • Interest rates may be lower
  • Can mix and match different funding options

Limitations of alternative finance

  • May be more expensive than traditional financing
  • Typically smaller loan amounts given
  • Generally shorter-term financing
  • Inadequate regulatory oversight — you need to read the fine print to avoid penalties

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