Why choose an alternative finance provider?

For many years, mainstream banks were the go-to choice for small business or franchise funding. However, in recent years, there has been an increase in the number of businesses turning to Altfi providers.

One of the reasons for this is that mainstream lenders can often be reluctant to lend to smaller businesses. Traditional lenders also tend to provide less flexibility in their loan terms and can take a while to fund businesses. By contrast, Altfi lenders can often send funds within 48 hours of application, and tend to offer more flexibility, such as fee-free early repayments.

Altfi providers also look at different criteria to high street banks, and so can often approve applications that would otherwise be rejected by traditional lenders. Specifically, the government-backed Bank Referral Scheme, which obliges banks to pass on businesses they’ve rejected to Altfi platforms, emphasises how Altfi providers can help businesses where traditional lenders fall short.

From asset finance to crowdfunding and invoice finance, there’s a growing number of Altfi products available to small businesses. We talk you through a couple of the most popular options below.

1. Unsecured and secured business loans

Unsecured and secured business loans from Altfi providers are similar to the business finance products offered by traditional banks. In particular, unsecured business loans are a good option for business owners that don’t have any assets and want funding fast.

This is because, unlike secured loans, which require a business owner to offer collateral against a loan, unsecured loans only usually require a personal guarantee. Because there’s no collateral to offset the loan against, businesses applying for an unsecured business loan generally need a good credit score and repayment history so that the lender can see they’re in a position to repay the loan.

On the other hand, because secured loans require the business owner to put up a valuable asset, such as a home, against the loan, lenders can offer longer repayment terms and lower rates too. This makes secured business loans a popular option with businesses looking for lower interest rates, or businesses who may have a less-than-perfect credit score, as valuable collateral may be able to offset this. They may take longer to approve though, due to the fact that the lender may need time to value collateral and assets.

2. Crowdfunding and peer-to-peer lending

Crowdfunding is a popular way for start-ups to raise money from multiple investors, or for small businesses looking to release a new product or expand their services. This is because it involves several individuals investing a small amount each, as opposed to one lender providing a lump sum.

In return, businesses either offer contributors a discounted service or product in exchange for their money. This is known as rewards-based crowdfunding. On the other hand, businesses could also opt for equity-based crowdfunding, which means that every person who contributes to the campaign becomes part-owner, as the business trades capital for equity shares.

Either way, businesses that opt for crowdfunding must invest in a strong marketing and PR campaign to get as many people interested in their story as possible so that they can reach their funding target. If the money raised doesn’t meet their minimum target, all contributions are returned to each investor.

Whilst crowdfunding is an equity stake, or an investment in return for a product or rewards, peer-to-peer lending takes the form of a loan. Businesses put themselves forward to a panel of investors on a digital platform, then investors choose which businesses they’d like to invest in, and can put forward a certain amount of cash. As with crowdfunding, each business must reach its target amount, or the money is returned to investors. If a business hits its funding target, it receives the money and repays funds to each investor at an agreed interest rate.

3. Government Grants

In addition to the above, there is a whole range of government support offered to small businesses looking for funding in South Africa. For example, the Small Enterprise Finance Agency offers an Enterprise Finance Guarantee Scheme across South Africa to businesses that are unable to secure finance due to a lack of assets to offer as collateral.

As such, providers of the scheme are incentivised to offer businesses term loans, revolving credit and asset finance, amongst more. In addition, the South African Government also offers a wide range of local or regional government grants, many of which are aimed at small businesses that are contributing to the local economy by creating jobs, or that create products that can benefit South Africa.

If you want to find out more about the specific government grants available to your business, a good place to start is by checking the Startup Mzansi’s business support finder, which features a wide range of grants currently available across South Africa.