Alternative business lending: non-bank financing options for SMEs

The volume of bank loans granted to SMEs in Europe has fallen by 10% in recent years. Small businesses are finding it extremely difficult to access the finance they need to expand, with only 42% seeing their needs fully covered. 

This highlights the inability of traditional lenders to adequately serve this crucial economic segment. 

As a result, alternative financing has become an increasingly popular option for SMEs seeking solutions more tailored to their needs. 

A number of innovative and flexible alternatives now let businesses finance their short- and long-term growth projects while retaining maximum freedom. We’ll take a look at some of them here. 

What is alternative lending?

Alternative financing is really any financing solution that departs from traditional banking. Usually, when a business needs capital, it applies for a loan from a bank and presents its project following a standard application process. In return, the bank may offer a loan with a repayment schedule over a set period.

This is the starting point. But it doesn’t always correspond to the specific needs of certain companies. This is where alternative financing comes in, offering a multitude of options outside the traditional bank loan framework.

Short-term solutions for alternative financing 

• Trade credit is perhaps underutilized by SMEs. It’s an agreement between two companies to trade goods now in exchange for payment later. For a company short on cash, this lets you acquire and sell products before paying for them. Otherwise, you’d struggle to acquire the goods to sell in the first place. 

This method of financing, encouraged by the “Macron law,” is set to develop further in the years to come.

• Assignment of receivables and factoring are two solutions that let companies assign their outstanding receivables to meet their working capital requirements. You essentially sell your unpaid customer or supplier invoices to a third party, so you receive the cash immediately. Customers will either pay the third party directly in due course, or you’ll forward the payments when they arrive.
  
  These mechanisms let you keep cash flowing and speed up your cash conversion cycle. 

• Revenue-based financing (RBF) provides an advance against your recurring revenues to cover your costs while preserving your capital, facilitating faster growth. Unlike traditional loans, RBF is based on a company's current or future revenues rather than its balance sheet, and does not require collateral or asset disposals.
  
  This option is fast and flexible, and brings forward cash flow to invest in growth.

• Embedded lending makes it possible to borrow on a short-term basis within the tools you already know and use. For example, Buy Now, Pay Later (BNPL) schemes let consumers buy goods through Amazon, Shopify, and other e-commerce merchants. It’s similar in this way to trade credit, but even faster and more automated.
  
  While this is mainly active in small B2C transactions today, lending-as-a-service tools make it possible to embed lending in virtually any platform. Soon we’ll see short-term credit available in invoice management systems, accounting platforms, and all over the business tech landscape. 

• Pitch competitions and grants are an opportunity for companies to move away from traditional financing schemes. They’re a fast track to receiving financial endowments, as well as partnership opportunities and meetings with investors.
  
  The major advantage of these competitions is that they make it possible to obtain funds without requiring collateral, or often even paying the sum back. They may be more of a long shot, but can be one of the fastest ways to obtain a capital injection.

Long-term alternative lending solutions

• Crowdfunding: this form of participative financing lets individual, non-professional investors contribute to projects, with no real limit on the number of contributors or the nature of the projects they invest in. 

There are three distinct forms of crowdfunding:

• Crowdlending, a loan that lets investors recover their investment at a later date, with or without interest.
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• Peer-to-peer lending is similar, but often done on a one-to-one or smaller scale basis. 
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• Equity lending, which enables investors to acquire shares in a company and become shareholders. We think of it as crowdfunding when investors aren’t professional. Otherwise it falls into one of the following categories. 

Other options aside from crowdfunding:‍

• Business angels are an interesting solution for companies in need of cash. These investors, experienced in business and finance, provide funds while retaining a minority stake in the company's capital. In addition to their financial contribution, their expertise and advice are particularly valuable to the company. They often have an influential network, offering the company opportunities for accelerated growth in the desired direction.
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• Investment funds work the same way, but at an institutional level. They finance companies in exchange for an equity stake. In addition to their financial contribution, shareholders are actively involved in the company's development. In France, there are more than 300 investment funds available to support SMEs.
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• Incubators also provide necessary alternative financing to growing startups. These structures specialize in supporting businesses, generally over a period of one to three years. Their mission is to provide valuable advice to help businesses develop, while facilitating access to finance by putting them in touch with investors. Incubators therefore represent an excellent opportunity to benefit from strategic and financial support throughout an entrepreneurial project.

Innovative and advantageous alternatives to traditional financing

Alternative financing offers many advantages for SMEs. It provides rapid access to capital to meet immediate needs, such as the purchase of equipment or inventory, without going through the lengthy procedures of traditional lenders. What's more, it can be tailored to the specific needs of the business, with flexible repayment options and additional services. 

Unlike traditional loans, many alternative solutions don’t require collateral, which is a benefit for small businesses or start-ups with no assets. They also benefit from less stringent credit criteria, as they are based on a company’s current financial data rather than its credit history (in many cases). 

This type of financing also brings greater transparency, more flexibility in repayment terms and simplified financial flows thanks to automation. 

It stands out for its speed, simplicity and flexibility. That's why the sector is booming in France, with more than 17,775 companies and projects financed in 2015, totalling more than €300 million.

Explore the best alternatives to loans

Whether in the short term, with solutions such as inter-company credit and factoring, or in the long term with crowdfunding and private equity, alternative financing offers SMEs a variety of options to support their growth and meet their financial needs. 

These methods, which combine speed, flexibility and simplicity, give you access to resources outside the traditional banking framework and let you look to the future with confidence.

Defacto is one such option, with fast, fair, flexible financing in under 30 seconds. Get instant access to on-demand financing to support your development needs and projects.