Alternative funding for SMEs – navigating the landscape
We recently sat on a panel with Invest & Fund, at an alternative finance event organised by the Federation of Small Businesses, and the Institute of Chartered Accountants for England and Wales (ICAEW). It was extremely informative to hear first-hand about the explosion of interest in peer-to-peer lending, and to learn how Invest & Fund plays into that market.
With that in mind, we thought we’d ask them to write a guest blog about their marketplace – and here we are with a post from Mark Hawkins FCA, founder and CFO of Invest & Fund! We hope you will find this as informative and educational as we did.
Alternative funding for SMEs – navigating the landscape
I have now been working in SMEs for over 30 years and have experienced the evolution of the traditional banking industry as it adopts the huge technological advances that have occurred during that period.
Retail banking is a conservative industry and adapts very slowly. The principal advance over the last three decades seems to me to have been the replacement of the old school bank manager who would look a person in the eye and make a personal decision to back, or otherwise, the prospective borrower based on their years of experience in the area, with an information gatherer with the pleonastic words ‘business’ and ‘manager’ somewhere in their job title, whose role seemingly is to input the information into a computer which, although itself operates in nanoseconds, surprisingly takes several weeks to provide a decision. In recent times the decision is invariably not the answer the SME was hoping to receive, usually associated with a lame excuse e.g. “poor credit history” or “high risk business category” leaving the SME perplexed and further time having elapsed.
Traditional banks seemed to have missed a trick. They have emphatically failed to embrace modern technology in innovative ways and their own burdened cost structure has meant it is prohibitively expensive to provide the small scale loans required by SMEs.
This withdrawal from the SME market, although denied by the banks but clear for all SMEs to see, has created an opportunity for others to fill the gap left by the traditional models in new and creative ways.
Two hundred and fifty years after the banks’ traditional customers had theirs, the banking sector is finally undergoing its own Industrial Revolution, demonstrated by the growth of the alternative finance providers, who are rapidly becoming the mainstream funders to the important SME sector, a sector which employs around half of the working population of the UK.
The alternative finance concept is very simple;
- use available technology to put beleaguered individual investors who are unable get a real return on their cash directly in touch with SME borrowers who need, but are unable to obtain, finance in order to grow their business and create employment in the UK.
- Step two, make the process of investing or borrowing simple, quick, user friendly and cost effective by reducing the margin spread, utilising the available technology efficiencies.
- Step three, demonstrate that alternative finance providers are a real alternative to the traditional lenders and attract individual investors and borrowers to the site.
The alternative finance sector is growing rapidly, currently at around 120% per annum as a whole, with the Peer-to-Business sector hitting 165%.This growth is forecast to continue unabated in the foreseeable future as investors are attracted by the real returns being offered, providing a vast source of liquidity for lending and more borrowers become aware of what is available through these platforms.
There are now a number of alternative finance providers offering a range of funding models, collectively ensuring perfect suitability according to the individual borrower’s specific requirements. There are also a number of comparison sites such as AltFi Funding and Business Finance Compared to make life even easier for SMEs to find the most suitable type of finance for them. Typically, these providers might offer simple repayment loans, take an equity stake in the business, offer discounted invoice finance or loans for capital asset acquisition, which itself may be targeted to certain assets e.g. property or equipment purchase.
Interest rates may be fixed or derived from an auction in which investors bid to secure part of the borrower’s loan. The period of the loan offered are usually variable to suit the borrower’s cash flow. All of the administration should be undertaken by the exchange platform, dispensing with the bureaucracy and reporting requirements of traditional banks.
There are pros and cons to each model and a good provider will always be transparent about how their model works, the costs involved and determine if their offer is right for you whether you are a borrower or an investor. Your IFA will be able to assist you with this, or alternatively the providers’ websites are a good source of information and most include a Q&A facility and additionally have good communication channels by email or phone.
The Government is very supportive of these platforms, supporting SMEs by delivering the Business Bank finance through them, and is consulting on enabling individuals to invest £15,000 per annum through new ISAs. Legislation is also being put in place to tell banks that they must refer SMEs rejected for credit to alternative providers who may be a better fit.
Despite the banks’ continued reluctance to lend to SMEs, there has never been a better time to source finance for growth from alternative providers as the recovery in the economy continues. There is now a genuine choice of funding for borrowers, and the enjoyment of real returns for investors
I wish I’d had these alternative finance providers available when I sought finance.