Why this small business owner used a peer-to-peer personal loan for funds

And why she isn't planning on using a business loan any time soon.

Business lending has come a long way in recent years. Previously exclusive to the domain of banks, alternative lenders have been popping up to serve the underserved. However, some small business owners are still turning to forms of personal finance to fund their small businesses.

One of these owners is Mel Flanagan, owner of software and design company Nook Studios. Flanagan's work is project based and primarily with government departments, so cash flow needs to be managed carefully.

"Sometimes contracts just take a little bit of time to come through," Flanagan says. But while Nook Studios is a unique business, she says their cash-flow situation is quite common, with the cyclical nature of waiting for invoices to be paid just being "the nature of having a small business".

"We're not so unique. I think there are a lot of small businesses that work with the government," she says. "And this impacts everyone, whether you're an individual working with government or whether you're a little business like us".

To ensure she had the funds to keep her business going, Flanagan didn't even consider a traditional business loan because she knew she wouldn't qualify.

"I don't have a home," she says. "I'm just one of those people that don't actually have a home, so I don't have any assets to put against it. And so it means that even though the business is successful and I've got a great track record, it just makes it really, really difficult."

Flanagan needed a sustainable and secure source of finance for times such as pre-Christmas and January and February when office closures make contract payouts difficult.

"We've also got our own projects that we are researching and developing," she explains. "And there was a time when it was necessary for us to have some time working on our product development, and that's when I came across RateSetter. And that was through a recommendation.

"I was aware of the peer-to-peer ecosystem and hadn't really considered it before because we didn't really need it."

Peer-to-peer lenders such as RateSetter differ from traditional lenders in that they do not provide funding themselves. Instead, the company facilitates the loan by matching you to an individual or group of investors. The borrower also receives a personalised interest rate based on risk factors such as how much they're borrowing, for how long and their credit score.

A lot of small businesses don't really make use of the things out there that can really help them

Flanagan said she had no concerns about applying for a personal finance product for business purposes.

"It's just really helping kind of manage the cash flow. You know, I don't really have that fear factor, and also the amounts that we're applying for are reasonable as well, they're not insurmountable; they're not huge amounts where it becomes really overwhelming."

Because of the nature of her business and what she needs the finance for, Flanagan says she has no plans to use a traditional business finance product.

"What we're aiming for is sustainability and being able to get funding in. So these little chunks help with that and they're usually repaid fairly quickly. It means that I can go on a trip overseas to find funding or, you know, meet with funding or potential collaborators or potential investors."

Flanagan also says that there is a raft of other options that allow small businesses like hers to smooth cash-flow fluctuations.

"There are ways and technology [available] and a lot of small businesses don't really make use of the things out there that can really help them. So, for example, the export grant.

"The other, particularly for creative technology companies like us when we're developing our own products and services, is the research and development tax incentive that the federal government has through the ATO."

It's important for small businesses to know about all the options available to them, whether it's more traditional business loans, personal finance products or even government grants. Make sure you do your research before you decide what funding option is right for you.

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