It’s no secret that it has generally become very difficult for small and medium-sized enterprises (SMEs) to access funding through traditional routes. In fact, banks and other mainstream lenders have largely retreated from SME lending scenarios altogether.
However, while these dynamics can often make it more challenging for small businesses to find financing there are still plenty of good options out there for SMEs looking for financial flexibility. Here are some of the alternative finance options expected to grow over the course of this year.
Crowdfunding and peer-to-peer lending
There is no doubt that crowdfunding and peer-to-peer (P2P) lending mechanisms are on the march as an alternative finance option for SMEs; LawBite in fact has raised over £350,000 on crowdfunding website Crowdcube. The range and reliability of the platforms involved is broadening and users are becoming increasingly accustomed to the processes and the advantages involved.
Estimates suggest that the UK’s P2P lending markets were worth roughly £750 million in 2014, a figure up sharply from £193 million in 2013 and just £62 million in 2012. There is every expectation that more and more small businesses will turn to crowdfunding and P2P transactions for quick solutions to their funding needs in 2015 and beyond.
For companies without a strong credit rating, the process of trying to find finance can be a difficult one but asset financing presents a clear and straightforward solution in these circumstances.
The process essentially involves a company selling its assets and leasing them back on the basis of an agree price. Of course, this kind of situation won’t be ideal for a small company with big ambitions but where a business has valuable assets at its disposal but very limited working capital then the option can present itself as the least bad option under challenging circumstances.
Another mechanism often used to help companies stay afloat and move forward while they face cash flow difficulties is invoice finance. It’s a widely overlooked route to finance that involves selling invoices to third parties for a fee. Here again the mechanisms and platforms enabling these kind of mutually beneficial transactions are maturing and increasingly being relied upon by SMEs in the UK and elsewhere.
Among the various trends emerging within the alternative finance sector at present is a tendency for lenders to focus on meeting the needs of specific sectors. Partly as a result, short-term loans are increasingly being offered by lenders that specialise in certain sectors and particular types of company. Often the loans involved here will be high interest and offered on the basis of trading performance but they can be a crucial lifeline for small companies finding it impossible to access finance elsewhere.
It seems inevitable that the UK’s alternative finance industry as a whole will grow sharply in the coming years with traditional lenders showing few signs of altering their lending policies when it comes to SMEs. The above are all areas likely to see expansion but there is every reason to expect new alternatives to emerge onto the scene as well.
Mark Halstead is from Red Flag Alert, part of the Begbies Traynor Group, and is now in his 10th year with the business. He’s worked at companies across the financial services industry and is a fellow of the Institute of Sales and Marketing.