What is alternative finance and how can businesses best utilise it?

This article is by Ann Juliano, CEO of Muse Finance

The festive season is meant to be a merry one, especially for small businesses. But this year, and into 2023, SMEs could be forgiven for having a bleaker-than-normal outlook.

It’s been an unimaginably tough few years for the UK’s SME community – hard hit by the pandemic, then war in Ukraine and global commodity shocks delivered a second wave of difficulty.

Add to this the ongoing Brexit uncertainty and a consistently turbulent fiscal policy from the government, it’s not surprising that a massive 43% of SMEs have been forced to close.

For those still going, it’s time to do something different, and that includes considering alternative finance options in order to keep moving forwards.

What is alternative finance?

At its core, alternative finance (or alt-fi) is the name given to the financial products and services which sit outside of traditional banking. Often used by smaller businesses which can’t afford, or can’t access, products from traditional financial institutions, alternative finance encompasses all manner of offerings. Basically, if the finance isn’t coming from a big bank, its alternative!

Early examples of alt-fi include things like peer-to-peer lending or crowdfunding. Businesses like Crowdcube and Seedrs have collectively unlocked hundreds of millions – if not billions – in equity-based raises for smaller businesses in recent years.

And the scene has evolved beyond raising capital for growth. There are alternative finance solutions which cater to the ongoing, day-to-day needs of SMEs, ranging from cashflow management to invoice chasing. Even more importantly, there are also financing tools that don’t rely on putting small businesses into more debt.

For example, at Muse, we specialise in invoice and supply finance. Invoice finance can give small businesses access to tied up funds in unpaid invoice – they’ll come to us and in less than 24 hours we’ll pay the business what they’re due, meaning they can carry on with business as usual and not be held back by a blockage in their cash flow.

Supply finance is where a business needs support paying their suppliers ahead of receiving money from clients or customers. In these instances, Muse will pay the supplier directly – again, this can happen in less than 24 hours.

Where is alternative finance headed?

Even though some areas of alternative finance are fairly well established, as a sector it’s still in its infancy. Over the next year we can expect to see plenty of innovation – especially as we expect to see demand for alternative options increasing in the face of a lack of viable support for SMEs from traditional sources like banks.

Even in the face of a recession, we also still expect to see investment in the space.M&As and consolidations will continue apace as investors look to capitalise on growing demand for alt-fi against a backdrop of economic turbulence.

In particular, investment in B2B alt-fi will continue to outstrip investment in B2C businesses and products. We’ve already seen this in 2022, with investment sitting at $18.5bn for the former compared to $7.5bn for the latter.

Why is this? Well, investors finally seem to be waking up to the untapped potential in the B2B space – alternative consumer facing financial products. For example Buy Now, Pay Later services, have long benefitted in investment which has made the products slicker. The B2B world is now playing catchup with many expecting the same quality of user experience in business lending.

We can also expect to see more products come to market which compete with offerings from traditional finance sources. Things like capital loans and asset-based lending are examples of products that have traditionally only been available to large companies and corporations, but with modern technology and KYC, can now be accessed by increasingly large numbers of smaller, younger, businesses.

We will likely see more alternative financial instruments emerging in the coming months, likely enabled by the great steps being taken in open and embedded finance, and which partnerships in the fintech space are making more accessible all the time.

Making the most of the opportunities

With turbulent times ahead, SMEs should take note of the opportunities alt-fi offers – new systems, processes, products and services all make for quicker, easier and cheaper financing. In an anxious period of belt-tightening, alt-fi could therefore be an instantly effective means of alleviating financial pressure.

There are, of course, still regulatory questions surrounding some corners of alt-fi – particularly when it comes to the focus on Know Your Customer (KYC) and the UK’s heightened awareness of fraud post-Covid. These trends will persist into 2023, but will likely only strengthen what is an increasingly viable suite of alternatives for SMEs.

For businesses which rely on legacy systems or traditional finance, but want to adopt alt-fi, the main thing to consider is taking it one step at a time.