By Ian Duffy, CEO of Accelerated payments
Since the early 1980s, the UK has not faced the rates of inflation it is currently experiencing, as households suffer the biggest ever hit to their incomes. As the costs of energy, food and fuel reach new heights, it is becoming increasingly untenable for many to afford even the basics of life. Similar situations are unfolding in Europe and the United States as households and businesses struggle to stay financially afloat.
In such challenges, banks and traditional institutions often fail to provide adequate support to businesses that need it most. Traditional options like bank loans usually require a credit check, as well as assets such as security (which can be at risk if the company defaults on the loan), and may impose fees if a payment is late or missed, which can be extremely difficult to predict. in times of volatility.
Instead, these four alternative fintech solutions can support business owners and help keep them in the dark. Each provides businesses with the funds needed to scale their operations and build resilience for the future.
The first is invoice financing, which helps businesses obtain cash advances on specific outstanding invoices. Providers such as Accelerated Finance can help businesses borrow what is owed to them by their existing customers.
This allows businesses to avoid waiting for typical payment terms (which can be 90 days in some cases). A business can choose the number and invoices to use and easily access funds without incurring fees on each invoice or having to fund an ongoing line of credit.
No personal guarantee or additional security is needed, as the invoice financing provider can approve your debtor or buyer and provide credit for their payments. Cash can be quickly raised and made available as soon as an invoice is issued.
Then there is crowdfunding platforms like Crowdcube, which rose to prominence during the COVID-19 pandemic. As social distancing measures and lockdowns brought typical operations to a sudden halt, businesses of all sizes used these platforms to connect with their core customer community to stay afloat.
Crowdfunding allows existing and potential customers to purchase goods, services or packages in advance. With crowdfunding platforms like Seedrs, they can contribute a sum in exchange for a minor stake in the company.
It has proven to be a popular route across various industries, from technology companies to fitness companies to food and beverage. Tiny, newly formed startups alongside much more established brands like Monzo, Grind, and Nutmeg have used this route to grow.
There is also platform providers for e-commerce businesses that operate on platforms such as PayPal or Shopify. Business owners with an online store on a specific platform usually have easy access to merchant cash advances.
This lump sum can be requested for a flat fee, and the business owner provides the platform with a percentage of daily sales until the full amount has been paid off.
Merchant cash advance rates are generally higher. There is also no interest rate; instead, borrowing costs are adjusted by a factor rate. When you are unsure about the sales performance in the next moment, this can be a great option because there is no fixed term or fixed payment amount.
Finally, there is revenue-based financing. Although debt and equity financing have been the default options for most new businesses, they require founders to provide personal guarantees or provide equity. On the other hand, revenue-based financing provides businesses with capital in exchange for a percentage of their future revenue.
This type of financing tends to be flexible, quick to access, capital-free, and unsecured. The critical thing these lenders will look at is a company’s financial history, which will influence how much they might lend you.
Business owners don’t need to prepare a pitch deck or a long business plan. Instead of mountains of paperwork, these tools connect to back-end systems to review projected earnings and make quick funding decisions.
The coming year will undoubtedly bring new challenges for businesses and the customers who support them. In times like these, innovation can become imperative for companies determined to survive. As companies pivot and adapt their typical operations to adapt to this new landscape, tools that once seemed too risky are suddenly becoming a necessary gamble.