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Finance Alternatives

Finance: there are many alternatives to taking out a loan

Other ways to raise finance

When you are seeking to raise finance, there are a number of alternatives to conventional loans and mortgages. This page outlines some of the options that fall in three broad areas:

  • Other forms of finance borrowing
  • Shared Ownership
  • "Free" funding

Other forms of finance borrowing

All forms of finance borrowing involve you accumulating additional debt, which you have to repay. Before you take out a conventional loan or mortgage, consider some of these alternatives:

  • Agreed Overdraft

    This is a form of unsecured loan. Agreed overdrafts can often be a very cost-effective way of borrowing money, but are not to be confused with unauthorised overdrafts, which are very expensive.

    With an agreed overdraft you agree with your bank manager a limit on how much you can go overdrawn on your current. You pay interest only on the amount you are overdrawn (not the agreed limit) so if your funds go up and down a lot, this can sometimes work out cheaper than a normal loan.

  • Guaranteed Loan

    If you do not have any security (eg: you don't own your house) then it may seem that an unsecured loan is your only option. But, suppose your parents have a good track record at the bank, and they own their property: some banks may allow your parents to "guarantee" the loan (ie: your parents promise to pay it if you can't) for which you can then get a lower rate.

  • Family or Friends

    In some cases, family or friends may be prepared to lend you money, and even leave it to trust that you will repay it. Even so, it is a good idea to put the arrangement in writing (even if only a brief letter) including the timescale in which you will pay it back, and any interest, to avoid any misunderstanding and/or resolve any dispute if things go wrong.

  • Shop Schemes

    Some shops offer "interest free credit" schemes or similar to encourage you to buy their goods. These can sometimes be good opportunities to borrow money cheaply. However, they can also be a cleverly-disguised expensive option: for example, if you pay cash, you might get a substantial discount on the purchase price. So, it may be cheaper than the shop scheme if you borrow money elsewhere and pay the discounted price.

Shared ownership

"Shared ownership" is normally used in house purchases or businesses. However, it can be used for almost anything where an expense and asset can be shared amongst a group of people: a luxury/sports car, a caravan, etc..

In shared ownership, you are not accumulating as much debt because you only have to pay for your share, not the whole value of the asset. However, the other person or organisation takes a share of an asset, of which you have part ownership, thereby taking a share of any income derived from that asset, or a share of the proceeds when you sell it.

In some cases, shared ownership also includes a share of the use of the asset. If you share ownership of a car or caravan with friends, then it is normal for you to share its' use throughout the year. However, if you share ownership of a house with a housing association, you usually have exclusive use of the house.

Types of shared ownership include:

  • Housing Association Schemes

    Equity-sharing schemes are often designed to help first time buyers enter a housing market, or enable someone to buy a house that they could not otherwise afford.

    You buy a percentage share of the house and the housing association buys the rest. You then have exclusive use of the house, but when you sell it, you share the proceeds with the housing association, eg: using the same percentage split as the original purchase.

    With a shared ownership scheme, you incur much less debt than you would otherwise have done, because you are only having to borrow money to finance a percentage of the value of the house, not the whole value.

  • Venture Capital

    When you are seeking to finance a business, when it is a new project or growth of an existing business, a venture capitalist provides you with the funding you require in exchange for a share of that business. The advantage is that you do not have any debt associated with that finance; the disadvantage is that you have to share the proceeds (whether income or asset growth) with the venture capitalist.

    Although a venture capitalist may get involved in the overall financial management of the business, he/she usually doesn't get involved in the detailed day to day running of the company.

  • Joint venture

    In a joint venture, you find someone else to both invest and work with you in your business project.

  • Limited Company Shares

    You can also raise money for a business venture by setting up a limited company and selling shares to investors.

"Free" funding

Finally, there are some sources of funding where you can get money 'for free'. There are usually criteria used to decide if you qualify, and often the money is provided on certain conditions. Examples of free sources of finance include:

  • Grants and Sponsorship

    For certain types of projects you may find that grants are available, from the government, charitable institutions or commercial organisations. For example, if you want to insulate your home then you may qualify for an energy grant. If you are wanting to undertake some repairs on your home, and it is a listed building, then you may qualify for a "building at risk" grant.

    Grants are sometimes available from other organisations if you are carrying out a project that will benefit them or the community they serve. The European Community have a number of grants to support social and economic development and regeneration.

    Some commercial organisations sponsor students through university, thereby eliminating the need for a student loan.

  • Social funds

    If you are experiencing financial hardship, there are many organisations that are prepared to help. Social services can provide money to purchase basic essentials, and/or pay rent, and there are other government schemes to provide financial help to those living close or under the poverty line. Also, in the UK for example, there are many charities aimed at relieving those who are experiencing financial hardship.

  • Sale of assets

    Another way of raising money is to sell assets that you have. If you own your home, you could 'downsize': sell your property and buy a cheaper one, or rent. For smaller amounts of money you could sell unwanted items through local auction houses or online via Ebay, Amazon or other virtual marketplaces.

  • Get a better income

    This isn't always possible or easy, but some organisations pay better wages than others. If you are working in a job where the pay is poor, examine whether it is possible to get another job that pays better.
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