Alternative Types of Finance to Consider

There are many forms of finance available to businesses both small and large. This includes a range of established routes of funding such as traditional unsecured loans, business loans and even mortgages. There are also potential uses for businesses when it comes to slightly less traditional loans and financial arrangements including payday loans, log book loans and others.

Alternative business finance

In recent times though, there has been a surge in further alternative forms of finance and this includes the likes of mezzanine finance, merchant loans and merchant cash advance alternative loans (source: Cube Funder). A major benefit of these new and emerging loan types is that they tend to be designed to fulfil specific needs of businesses is specific sectors.

This tailormade approach means that the terms of these agreements when applied properly and the benefits to be had are far greater than when more generic loans such as payday or standard business loans are used. It tends to be the case that the lenders offering the more bespoke loans know their industries much better than generic loan providers.

Merchant Loans

Merchant loans are a funding solution that is perfect for retail outlets and businesses. They work by the business borrowing the funds repaying the loan amount plus interest via their credit and debit card terminal payments. For example, a business that regularly turns over £50,000 per month may need to borrow £50,000 over a 6 month period. In order to do so, a merchant lender will spread the cost of the loan over the 6 month period and apply interest. If the interest on the loan is 20%, the total loan value will be £60,000.

The loan terms would therefore dictate that the merchant [borrower] pays 20% of their regular monthly card revenue (£10,000) to the lender.

A major benefit of these loans however is their scalability. Because the loan repayments are based upon proportions and percentages of card revenue rather than repayments of a fixed monetary amount, as revenue increases so too do repayments. Conversely, should the borrowing business have a slightly quieter period, their repayments will be reflective of this, not putting them under any increased pressure in the same way a traditional loan likely would.

Another benefit of merchant loans is that because the terms are fixed in the form of the percentages of card revenue, the merchant is free to apply for other lines of credit to an extent should they require for their business.

Whilst the lender will require the borrower to amend their card payment terms and likely their provider of these services, the rest of the business runs as normal with no changes throughout the term of the merchant loan. Moreover, should business improve during the loan term and revenue increase via card terminal payments, the borrower is able to repay the loan early as the percentage of revenue from the card machines would cover this quicker than expected.

Business financing

Mezzanine Finance

Mezzanine finance is a hybrid between property finance and business equity. These loans tend to be second charge loans and they are normally used to tide over a business; getting it up and running through investment. These loans will usually be used for higher risk ventures where finance may be hard to come by for the prospective borrower and where they already have finance secured against a portion of equity in a property.

Mezzanine loans will be secured against a proportion of a property with a stipulation in the agreement that should the borrower default on their payments, the lender will automatically acquire shares in the business. The lender can then either stay involved with the business and receive a share in their profits or they may sell off the shares at a profit in order to recoup their losses.

For example, a borrower may own a property worth £1 million which has a first charge loan secured against 60% of its value, but they require a further 20% (£200,000) for their business.

A mezzanine loan would work by the lender agreeing to provide say 50% of the required amount (£100,000) with 25% in the form of business equity and the further 25% being covered by the borrower. These loans allow businesses and ventures that would otherwise be unable to secure much needed funding, to be able to acquire the money they need to grow their ventures.