For many small and medium sized enterprises looking to expand, the source of your funding becomes a major issue when the bank that previously liked to say “Yes” now says “No, not really”. If your assets are already promised to the bank, your order book is full and suppliers need paying, or when cash-flow has been reduced to a trickle, alternative finance is where an increasing amount of SMEs are successfully turning to.
Basically put, ‘alternative finance’ is a variety of platforms from where to receive investment that does not involve the traditional lending institutions and/or pleading with the bank manager. These include short term flexible business loans, peer-to-peer lending, equity and reward based crowdfunding, community shares, invoice trading, and pension-led funding.
Merchant Money has published a guide to alternative finance which was inspired by the results of a survey undertaken by innovations charity, Nesta. The survey (as shown in results in the chart) uncovered that 56% of the small businesses surveyed were unfamiliar unfamiliar with any sort of alternative finance. However with the growing demands of SME borrowing and more businesses becoming knowledgeable on its benefits, Nesta report that the alternative finance market in the UK is forecast to grow from £1.7bn in 2014 to £4.4bn in 2015 – and is becoming an increasingly realistic and viable solution to finding finance for many SMEs.
1 Available finance when the bank says no
Government schemes are designed to encourage lending to SMEs, however since the 2008 financial crisis many banks have reduced the amount of funding to this sector. From those Nesta surveyed 79% first approached their bank for finance with just 22% receiving the desired backing. With the traditional route exhausted, the alternative financing industry is consequently flourishing alongside SMEs.
2 An option for when you don’t fit the desired lending profile
Traditional lending institutions will of course favour the experienced businessman over the young entrepreneur looking for growth funding. Individual and independent investors that are found through the alternative platforms are less biased and more open-minded, enabling those who are not able to meet the risk profiles of the banks to gain vital funding.
3 The proven long-term advantages
The survey reports that the SMEs using alternative finance methods reported increased turnover and improved profit as a result. Lending enabled them to launch new products, add to their services and take on larger working premises. This is turn impacted on the surrounding community with increased local employment. Additionally, charity projects turning to alternative finance were able to secure essential funding that would not have been otherwise available via traditional means.
4 A fast and straightforward funding method
Alternative finance is an awful lot quicker than waiting for an answer from the high street bank, with their loan committees taking time to come to a conclusion. As most platforms operate online, companies such as Merchant Money promise a prompt response and the release of funds within 24 hours, without the paperwork and queuing in the banking hall.
5 Lending in order to fund a specific project
As traditional lending platforms prefer to provide large loans for a greater net return, the alternative route provides a bespoke tailor-made solution. You may simply require a quick cash injection for expansion, to fulfil a particular order, or to take on more staff, and repayment plans can be negotiated as financial or equity rewarded depending on the model used.
6 The flexibility and choice of lending methods
Just as the internet is a constant source of information for consumers, it is also for the business owner to now decide from where and how they are funded. With peer-to-peer lending you are finding investment on a more personal level from a source who’s genuinely interested in your ventures growth, whereas crowdfunding involves a variety of investors so you may be able to choose from those with the lowest interest rates.
7 The large scale benefits of alternative financing
Utilising alternative finance models contributes to the growth and vitality of the economy, and with a reduction in the dependency on bank lending it’s happy days for everyone, so you can go to bed with a warm, fuzzy glow knowing that you’re also contributing to the national GDP.