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An alternative future of small business finance?

  • Blog
  • 07 August 2018
As the latest figures from the Bank of England show that lending to small businesses has flat-lined, should more be thinking about the small but fast-growing alternative finance market? 

You're a small business and you want to borrow money, perhaps to buy or rent new offices, land, machinery or a cash flow loan to cover day-to-day costs.

Once it would have had to involve a meeting with the local bank manager - if not relying on your own funds or family and friends - but since the 2008 credit crunch, it has become more difficult for small businesses to get finance through the traditional high street bank.

Peer-to-peer lending, crowdfunding and asset financing are just some of the "alternative finance" options which have emerged since, fuelled by people's readiness to do more transactions online.

Many SMEs fear they will not be accepted for a bank loan. Others will only approach one lender and if rejected, may give up on getting a loan altogether.

Some may not apply in the first place. Economic Secretary to the Treasury John Glen recently told MPs that 47% of SMEs are "permanent non-borrowers".

But access to finance is crucial to growth and while banks remain the dominant source of finance, alternative finance options can offer small businesses more flexibility, easy application processes and better terms.

What are the options?  

Peer-to-peer lending (P2P):  Easily accessible model usually based online it matches businesses looking for loans with a, often large, number of investors. Interest is paid on repayments.

Equity crowdfunding: Similar to above but investors usually take a small percentage of equity in a company.

Business angels: Dragon's Den-style entrepreneurs privately investing in start-up companies, in return for an equity stake. They can also bring experience and "soft mentoring". 

Community development finance institutions: Social enterprises whose main objective is to loan to under-served markets that struggle to get mainstream finance. They will lend to micro and start-up businesses.

Asset finance: Loans are used to buy or rent equipment through hire purchase and leasing on longer agreements than many bank loans. They can be used to buy equipment like plant machinery, computers and vehicles. Funding is secured against the asset.

Invoice finance: The lender "buys" part of yet-to-be-paid invoices so the business gets the money straight away. When the invoice is paid - the business gets what is left, minus a fee to the lender.

These are just a few of a wide array of options. To help SMEs navigate them, the FSB has launched its own FCA-regulated funding online platform to help.

Its FinTech platform uses AI technology to bring small businesses together with more than 130 finance providers, including banks, as well as offering access to finance advisers.

It's all done online, small businesses can present their case anonymously to lenders who can then express an interest in getting involved. It also offers the "human element" for those who want it, with advice on the best way to present your business case, and follow up advice by phone or email.

The latest figures from the Bank of England showing the annual increase in lending to to SMEs, which has been slowing, actually dipped to 0.1% in May - the first time it has been negative in three years. 

And the FSB's Voice of Small Business panel survey also suggested fewer businesses were applying for credit.  

Meanwhile the Commons Treasury Committee, which is investigating SME finance, heard in summer 2018 that peer-to-peer lending had a flow of new lending of £1.8bn in 2017 - up from £0.1bn in 2012. Equity finance and asset finance had also seen rapid growth.

Dave Stallon, commercial director, FSB, said: "Traditional banks should not be the only way for SMEs to get finance. Alternative finance is growing quickly but is still a small part of the picture.

"The big rise in the number of funding platforms for SMEs out there can be off-putting and confusing which is why FSB has launched its own platform, that small businesses can trust."

FSB Funding Platform from FSB

Complete one simple online application and our platform matches you with the largest panel of business lenders in the UK.

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