In the last few months the media has reported a storm of negative coverage with the eye of the hurricane centred on that well-known square mile of land in East London. We have seen everything from corruption in the form of the Barclays Libor scandal to IT technical faults that affected thousands of RBS and NatWest customers. This brings into question the future of banking as we know it and we are likely to see increasing competition in the alternatives sector. Bank lending has shrunk by 17% over the past four years, in the months to May lending collapsed by £3 billion. SMEs are the key to economic growth, they account for nearly half the UK’s GDP and employs 60% of its workforce. Below are five alternatives to traditional bank finance, that have sprung up in the last few years, which specialise in individual services that raise and deploy capital in new exciting ways that use the most recent clever technology.
- Peer-to-peer lending
Online peer-to-peer lending services allow individuals to lend money directly to SMEs. P2P lending is a type of financial transaction that occurs directly between individuals without the need for the intermediation of a traditional financial institution. Person-to-person lending is for the most part a for-profit activity.
Peer-to-peer lenders like Funding Circle operate an online marketplace where people can directly lend to creditworthy small businesses. Funding Circle enables private investors to receive high, stable returns, and businesses to obtain low cost finance to grow and develop.
Originally crowdfunding used to focus primarily on social ventures and creative industries, however the idea of gaining finance from a number of individuals has now entered the mainstream. There are two types of crowdfunding, equity and debt finance. Debt finance crowdfunding is more akin to peer-to-peer investment where startups can raise funds by accepting loans that they set from “armchair” lenders. Equity crowdfunding is essentially receiving funding from many different small investors in return for tiny portions of equity.
Online crowdfunding facilitators like Crowdcube gives investors the chance to buy micro-sized slices of equity in start-ups. While it can take a while to secure funds, crowdfunding has the benefit of giving SMEs access to a pool of expertise in the shape of their investors.
- Invoice finance
Invoice finance is an asset based working capital solution that allows small businesses, to get cash that they are due from their customer immediately, rather than waiting 30, 60 or 90 days. It is a means of freeing up capital tied up in invoices with long remittance terms. Recently, factoring and invoice discounting, both forms of invoice finance, have become a major source of working capital. Factoring is a viable solution for late payments; this form of invoice finance converts unpaid or late paid invoices into cash; ultimately raising money on outstanding invoices and advancing cash quickly against them. However there are ongoing monthly service fees that are payable regardless of whether funding was required that month. In addition factoring means that the factor will manage your sales ledger and chase invoices on your behalf. For those who prefer to stay in control of their cash flow and credit management and sell only the invoices they choose to rather than have to sell them all there is an alternative and cheaper solution.
MarketInvoice is an innovative online marketplace for invoices that enables UK businesses to raise short-term finance or improve cash flow by enabling them to ‘sell’ invoices raised, to investors via online auction.
- Angel Investors
An angel investor or angel (also known as a business angel) is a high net-worth individual who provides capital for business start-ups, usually in exchange for convertible debt or equity. A small but increasing number of angel investors organise themselves into angel groups or angel networks to share research and pool their investment capital. An example is the UK Angel Capital Group.
- Community Development Finance Institutions
Community Development Finance Institutions or CDFIs provide finance, via interest-free or low-interest loans, to individuals, micro enterprises and small businesses that require only a small amount of capital and can’t obtain it from banks or other traditional lenders. Funding can be from £50 to £1 million. The Community Development Finance Association (CDFA) is a not for profit umbrella organisation for CDFIs that supports the development of a thriving and sustainable community development finance sector that provides finance for disadvantaged and underserved communities.
A force-for-good in the alternative finance community is the Next Generation Finance Consortium. An umbrella organisation founded by 8 progressive-thinking companies, which offer a full range of opportunities from crowdfunding to invoice finance, the NGFC is a new private-led initiative to create a platform where entrepreneurs can find alternative sources of funding for their high growth businesses. The NGFC also aims to liaise with Government bodies and other organisations to lobby for support on key issues relating to SME finance.
There is no silver bullet to solve the SME liquidity problem, even in the sphere of alternative finance there are so many options that a start-up may want to consider. From P2P lending, to debt-for-equity and, of course, invoice finance, SMEs will need to look at their business model and see how they can work with non-traditional bank lending. And for struggling entrepreneurs there is an alternative to bankruptcy in the form of an IVA. Read on for IVA advice.