The process of starting a business 20 or 30 years ago was a well-trodden and inescapable path: you needed to go to your high street bank, request a loan or overdraft, and fill in a lengthy application to prove your credentials. Hopefully you passed the test, and you would be provided with capital on a fixed interest rate, as well as repayment terms detailing installment amounts and timings.
However, banks have always had a conservative approach to lending, particularly when it comes to small and medium sized businesses, which can be seen as too risky due to a lack of assets or experience.
This has improved somewhat with the introduction of various schemes by the UK government to encourage banks to lend to SMEs: figures released by the Bank of England earlier this month showed that whereas in 2014 bank lending to SMEs fell by an average of £500m every quarter, this year net lending from banks to small and medium-sized enterprises through the Funding for Lending (FLS) scheme increased by more than £600m in the first quarter of the year and £490m in the second quarter.
However, there are still considerable constraints on lending, so SMEs and innovative start-ups are turning to alternative finance solutions.
The diverse range of solutions under the umbrella term of alternative finance – from crowd-funding and peer-to-peer lending to corporate cards – are all providing much-needed capital to help manage the working capital challenge, without following the traditional path.
As we know, these forms of alternative finance are providing SMEs with new ways to extend their cash flow, fund operations and support reinvestment in order to fulfil growth aspirations. However, they are also helping to make businesses fundamentally more entrepreneurial.
On a basic level, having better access to finance makes it a lot easier to start a business – and this means new organisations, products and services – helping to create a general sense of optimism and entrepreneurship.
For example, independent craft beer firm Brewdog created a buzz earlier this year when it raised a record £5m in the first three weeks of its crowdfunding round. Even seasoned entrepreneurs appreciate the benefits of these non-traditional sources of funding: easyJet’s Sir Stelios Haji-Ioannou raised an impressive £1.42m in an oversubscribed Crowdcube round for his new business easyProperty in September 2014.
Encourages entrepreneurial thinking
These alternative finance sources are also making businesses themselves more entrepreneurial, which is reflected in how they function internally.
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