Alternative Finance Explained: Jargon Made Simple

Friday 7th January 2022

These days, start-ups and established businesses alike have a whole host of options to choose from when it comes to funding and boosting cash flow. There are many alternative lending products that work in a different way to the traditional loan, and it can be tricky to know exactly what they all mean, let alone how to choose between them. In order to remedy this, we’ve drawn up a list of some of the terms you’re most likely to encounter, with an easy-to-understand explanation of what they all mean.

In this article:

  1. Crowdfunding
  2. Hire Purchase
  3. Invoice Finance
  4. PCP
  5. Peer-to-Peer
  6. Angel investors
  7. Overdrafts

1. Crowdfunding

Crowdfunding was never seriously possible before the internet, but it’s now a staple for startups and small enterprises with an idea that they think they can sell to the masses. The concept is simple; pitch your idea on a platform, and wait for tens, hundreds or even thousands of people to invest in the idea pre-launch. Kickstarter is perhaps the best known platform, but it’s certainly not the only one.

Crowdfunding is certainly an interesting choice, and it’s not for all businesses. It tends to work best with simple ideas that capture the imagination, particularly where you’re launching a new product or service. There are startups that have benefitted from this from the ground up, but it’s also suitable for existing small businesses that don’t want to go down the usual routes.

2. Hire Purchase

Hire purchase is most commonly used for vehicles, but can actually be used for many different assets, including things like large items of machinery. When a contract is taken out, you have the use of the asset for the duration of the period, paying a fixed sum at regular intervals (usually monthly), and then at the end of the agreement, the asset belongs to you. There’s usually a deposit to pay too.


Visit our cash flow resource hub for more cash flow finance advice, tips and resources

Cash flow resource hub


3. Invoice Finance

For many businesses, funding is required because of difficulties in cash flow. Invoice Finance seeks to remedy this by using invoices as collateral, or by selling them. In simple terms, once an invoice is raised, the provider will pay the borrowing company a portion of the value of the invoice (up to 85%). Once the invoice has been paid to the creditor, you receive the remaining value of the invoice, less the relevant fees and interest. This is a particularly attractive option for those who have a well functioning business, but cannot realise the cash owed to them quickly enough.

There are also a couple of variations within Invoice Finance, and namely they are Invoice Factoring and Invoice Discounting. The primary difference between them is that Invoice Discounting is entirely confidential as you the client maintains the credit control, whereas Invoice Factoring involves the provider handling the collections process, making them known to customers.

4. PCP

A Personal Contract Purchase is similar to hire purchase, and is almost always used as a way of financing vehicles, but does differ slightly. At the end of the agreed period, rather than owning the asset automatically, you are able to pay a final fee to do so. This fee is agreed at the beginning of the contract, and is decided by the projected value of the vehicle at the end. As a result, PCP payments are usually lower each month, though the initial deposit can vary.

5. Peer-to-Peer

If you don’t want investment, but are instead looking for a loan or similar, then peer-to-peer could be for you. Rather than going to your bank, you can go to other businesses that might be able to lend you the money. Again, there are websites and services that allow you to seek this kind of input. One of the benefits of peer-to-peer is that you may get the chance to make your pitch to someone who understands your industry a little better than the algorithms of big banks.

6. Angel investors

The internet has again made connecting with potential investors far easier than before, and there are now plenty of ways that you can get your proposal in front of those with money. Looking to give away some of the equity in your business in exchange for funds? Then an angel investor could be idea. They’re particularly useful if you know you’ve got a great idea for expansion that will seriously deliver in the future.

7. Overdrafts

Overdrafts are very commonly used, but still represent an alternative to the usual loan. With an overdraft, a lender will give you an agreed credit limit that you can use and pay back as you choose. There is a fee for using this facility, which often scales with the size of the overdraft. This is a good option for businesses that believe they may be able to pay things back early, and require flexibility. However, it can soon prove insufficient for a growing business, which is why more alternative methods have become popular.

Is your business suffering from cash flow issues? Find out how Novuna Business Cash Flow can help

Get a quote Call us

Back to top