As lending from mainstream banks to business is still declining, according to the Bank of England’s figures, this raises the prospect that a lack of understanding about alternative methods of raising capital could be costing British businesses dear.
To see what some of the main issues were we spoke to Tom Warrender, founder of Classroom Medics, who recently closed a successful crowdfunding campaign to expand his business, and John Allan, National Chairman for the Federation of Small Businesses (FSB).
What impact is alternative finance having on SMEs?
The quick turnaround offered by some alternative finance platforms is one major game-changer. “In some instances, businesses can get access to finance within two days, which is much quicker than the banks. Getting access in that time can be the difference between grabbing a growth opportunity, and losing it,” said Allan.
This is echoed by Warrander, who reported that the speed and ease of crowdfunding were the main aspects which drew him to it. After lower costs, simplicity and speed are the most attractive elements of alternative finance according to the UK Bond Network survey.
Allan also highlighted the range of options altfi is now offering businesses, from debt finance to invoice discounting and equity funding: “Though still relatively small in market terms, these providers are therefore beginning to chip away at the large banks’ dominance and doing away with the ‘one size fits all’ approach.”
Read more about alternative finance:
- While smaller than the industry in the UK, alternative finance in Europe cannot be ignored
- Alternative finance leapfrogging the banks?
- UK alternative finance market set to hit £1.7bn
Why aren’t more SMEs aware of it?
In 2010 alternative finance was a fledgling sector, raising under £200m in capital. This is compared with banks, who have been well-known institutions for hundreds of years.
“A main reason for low awareness of alternative lenders is simply the size of the large banks, and the shadow that they cast across the market,” said Allan. “Businesses instinctively turn to where they bank for finance in the first instance, whereas these challengers are comparatively small and often struggle to raise their profiles alongside huge institutions with established relationships.”
Warrander’s experience of crowdfunding indicates that businesses may also be hampered by trusted advisors not understanding alternative finance. He became aware of alternative finance through his business mentor.
“After finishing a five year loan with a traditional provider, when we went back to recapitalise they refused us another loan despite strong business growth and no missed payments on the previous loan,” he said. At which point his mentor suggested alternative finance.
It’s easy to see how a lack of understanding among mentors, financial advisors and accountants could compound the existing problem of low awareness among small business owners.
Could this cause problems for British business?
“Potentially,” said Warrander, “especially if business owners don’t have mentors or a wider view of the finance option open to them.”
“Around 35 per cent of SMEs are refused loans by the ‘big four’ and many do not apply again,” said Allan. “Not every business suits a standard high-street loan. If businesses were aware of their options then it might help them to seek alternative lenders or products that would better suit their needs, and make it easier for them to access appropriate finance that will help them fulfil their growth ambitions.”
Businesses not being fully aware of their options for raising capital is described by Keith Morgan, CEO of the British Business Bank, as one of the biggest barriers facing UK businesses.
It’s not hard to see how this could suppress innovation and growth, with knock-on consequences for the economy as a whole.
How to raise awareness of alternative finance?
“There is a place for both education and legislation when it comes to levelling the playing field for alternative finance providers,” said Allan.
“Clearly it largely falls to the industry itself to promote their services,” he continued. Warrander, based on his recent experience of investigating crowdfunding opportunities, says that platforms need to be more aggressive with their marketing, targeting potential customers across the full spectrum of digital media as well as obtaining coverage in the press.
But the government has a part to play too. They’ve already introduced legislation aimed at compelling banks to refer SMEs who are rejected for funding to alternative finance providers and invested £40m in Funding Circle, a peer-to-peer platform, via the British Business Bank.
“We’d also like to see the Government continuing to commit resources to the British Business Bank, which will allow it to continue its work in boosting and diversifying lending channels, and to link this provision with other business support initiatives,” said Allan.
“This would increase competition in the market, fill in financing gaps in the market, and make it easier for small firms who currently find it hard to navigate a confusing system.”
Elizabeth Grey is a freelance writer and editor, who specialises in finance, education and business.