The biggest myths about alternative finance

myths of alternative finance

The biggest myths about alternative finance

The alternative finance industry has seen staggering growth in recent years. The Centre for Economics and Business Research predicts that the market will be worth £12.3bn by 2020. Yet still only a small proportion of businesses turned down by traditional lenders go on to seek out alternative options. With alternative finance being a relatively youthful industry, myths around its use still abound. Here we debunk a few of the most common alternative finance myths. They may be holding your business back from choosing smarter funding.


Alternative Finance Myths #1 – Alternative Finance is too expensive

A common misconception around alternative finance is that it’s the more expensive option for businesses. Certain alternative finance products do offer higher rates of interest or fees than traditional bank lending. Yet if you choose the right product and use it as part of a focused and growth-driven financial strategy, alternative finance can actually prove to be more cost-effective for financing new opportunities and closing funding gaps.

Often high-growth business do not necessarily have the collateral to secure a ‘low-risk’ rating from a traditional lender and therefore be offered a lower rate of interest.A recent study by altfi revealed that just 30% of SMEs in the UK are able to borrow from an APR under 6%. Alternative finance products can prove to be less expensive overall when used regularly thanks to their flexibility and growth-focused attributes. 

Unsecured alternative finance products do not require a business to keep collateral tied up in order to secure a loan. This allows businesses focused on growth to keep their working capital more fluid and less tied up in assets, helping them remain lean and cost-effective.

In fact, the same altfi study found that 59% of business owners currently believe that it’s too expensive or time-consuming to look for a traditional bank loan.

Time is money

Alternative finance applications are designed to be swift and uncomplicated. The relative opportunity cost of going through lengthy traditional loan applications can prove too great for businesses enjoying a period of growth and opportunity. Missing out on a new customer because you don’t have the available working capital at short notice to fulfil the order could result in immeasurable costs to your business.

If your business needs money for a short term need, such as inventory, a longer-term loan arrangement is unlikely to be suitable as it would be too expensive. (You wouldn’t take out a 25-year mortgage on a new car, no matter how low the monthly repayments might be). The convenience of short-term alternative financing gives business owners more control over their finances and cuts borrowing costs for short-term financial needs.

The carefully-honed suitability of alternative finance products allows them to become an important and flexible part of a smarter cash flow management strategy. Products such as Pay4’s unsecured revolving credit facility offer fast injections of working capital without the often prohibitively expensive non-usage fees. Businesses are able to use their credit judiciously to maximum effect. They choose when to dip into their facility as and when it suits. This means business only pay for when they use their credit, unlike overdrafts and more inflexible loan arrangements. Businesses do not feel pressure to use their credit at inopportune times; everything is kept flexible enough for optimum usage. This encourages growth and keeps costs down, freeing businesses to seize upon opportunities swiftly when they arise.

Of course, it’s always important to shop around to discover the very best product for your particular circumstances. It’s not just about initial cost or fees. Speed, simplicity, flexibility, and a lack of non-usage fees are key to keeping things cost-effective.

Alternative Finance Myths #2 – Only businesses rejected by banks use alternative finance

Another alternative finance myth is that only those businesses rejected by traditional lenders then dip their toe in the waters of alternative finance.

This simply isn’t true.

In 2015 the Treasury revealed that 324,000 SMEs sought a bank loan or overdraft and 26% were initially declined. Only 3 per cent of those rejected by their bank sought alternative options. This highlights two things: Firstly, that alternative finance is not merely a refuge for businesses that are declined by their banks. Secondly, that reliable factual information about alternative options needs to improve.

Thousands of successful, growth-focused businesses choose to explore alternative finance as their preferred route to easing the cash flow pressures. These can be brought on by seasonal demand spikes, changing supplier circumstances, large customer orders and other unexpected events or opportunities. Alternative finance companies offer fast response times, swift application procedures, streamlined administration and flexible terms. This often makes them a more attractive option for businesses seeking short-term financing.

Options such as Pay4’s unsecured credit facility allow successful businesses to borrow the cash they need to fund their growth. Without having to provide collateral. Particularly useful if a business is relatively young and asset-light yet enjoying good growth.

Pay4 doesn’t compromise the security arrangements you may have with other lenders or business funders. This means it can be used alongside existing finance. Helping to close funding gaps and foster well-rounded, agile cash flow management optimised for your business.

Rather than a backup plan, alternative finance an integral part of a smarter cash flow strategy.

Alternative Finance Myths #3 – Alternative finance is only for companies in trouble

The simple fact of the matter is this: Alternative finance companies are not generally in the business of lending to companies more likely to default on their repayments. They would never secure investment and would soon go out of business.

Alternative finance customers are successful, thriving businesses, often enjoying healthy gross margins. They’re simply seeking smarter, simpler and more flexible ways to close cash flow gaps and maximise opportunities for growth.

Take our own criteria as an example. we offer an unsecured revolving credit facility, so we only work with UK businesses with a track record of growth and stability. Businesses who, among other things:

  • Have been trading for over 3 years.
  • Are profitable with a capital base of £200k.
  • Are enjoying a turnover of £1.5m+ per annum.

We’re in the business of helping successful companies grow.

Alternative Finance Myths #4 – Using alternative finance will worry your customers/suppliers

Alternative finance has grown to become widely used by businesses of all types, across many different industries and sectors. Now seen as a sign of being financially proactive, the use of alternative finance has moved firmly into the mainstream.

Yet some businesses still avoid alternative finance. They believe they’ll be tied into restrictive contracts or lose confidentiality vis-a-vis their suppliers and customers. This myth has basis in invoice factoring/discounting and supply chain finance, yet does not apply across the entire industry.

For instance, Pay4 is an unsecured supplier payments finance facility. Also known as an ‘accounts payable’ finance product, it injects working capital earlier in the supply chain. It does not involve your suppliers or customers.

Ready as and when required, the pre-approved credit line provides cash to pay supplier invoices as they arise. Without relying on security from unpaid customer invoices or the taking over and managing of entire accounts receivable ledgers.

Benefits throughout the supply chain

This early injection of cash allows businesses to secure favourable terms with their suppliers through early or prompt payment. You can fund opportunities swiftly without the need for customer invoices to be raised beforehand. You can fulfil those all-important large-scale customer orders through boosted inventory. And you can offer favourable credit terms to your valued customers thanks to a bridged cash flow gap. Your business can be free to grow.

With accounts payable finance, the finance provider only has to assess your ability to repay, rather than that of your customers or suppliers. All your suppliers and customers see is a strong, dependable business that settles its invoices swiftly, fulfils orders reliably and offers favourable credit terms for quality products and services.

Alternative Finance Myths #5 – Using an alternative finance company is more risky

A large number of alternative finance companies have therefore started over the past few years. This has done two things: Firstly, there is so much choice that businesses can be left confused or fatigued by the sheer number of options. Secondly, it has left a lingering worry that a number of irresponsible lenders will have sprung up overnight. Thus making alternative finance a more risky proposition.

However, now recognised as engines for growth and stability in the UK economy, alternative finance companies have enjoyed full endorsement from the UK government. They are now actively seeking to unite SMEs with suitable alternative lenders.

Of course, as with all industries, there are those who do not operate entirely ethically or with due rigour. However,alternative finance companies need to secure both institutional investors and governmental backing. Therefore they  must continue to demonstrate sound business sense and comply with investment criteria with transparency and confidence.

Trusted providers are endorsed by respected brokers and operate to strict lending criteria and risk assessment. Often in partnership with well-established financial institutions (for example, Pay4 works in close partnership with Santander). 

The personal touch

In terms of supporting your business, alternative finance providers usually provide a more personal and tailored service to traditional lenders. A single point of contact who is likely to have a more intimate understanding of your industry sector, and the specific needs of your business.

Run by successful entrepreneurs with cherry-picked senior leadership teams, alternative finance providers fully understand the needs of SMEs. Having spent their time at the coalface, they’re experts in what SMEs require to grow. They understand the challenges they face, and bring specialist knowledge across a range of sectors.

Through simple-to-use digital platforms they also offer the added benefit of being able to provide SMEs with access to capital in days, rather than weeks or months. This reduces one of the most fatal risk factors in the growth of a business: missed opportunity.

A smarter alternative

The above alternative finance myths are the most common we hear from business owners who have not fully investigated the benefits and opportunities that the right product can provide for their business. The reason these alternative finance myths circulate is that the industry is still relatively young. It therefore has not had the time to secure itself in the minds of more traditionally-inclined businesses. By debunking some of the more common alternative finance myths, we hope to help businesses make the right decision to fund their growth.

If you’re looking for a working capital solution to pay your suppliers and boost your growth, drop us a line at Pay4. Our credit limits, which range from £50,000 to £1 million, can be used, repaid and reused as often as your cash flow cycle requires.

We only charge a straightforward transaction fee as and when you choose to use the facility. Simple, flexible and cost-effective. This is working capital redefined.


The biggest myths about alternative finance