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Alternative Finance: What does it offer the SME?

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Airto Vienola, CEO of Arex Markets discusses how SMEs can integrate alternative finance, and how we can overcome the ongoing challenges SMEs face.

It’s not just summer holiday plans that are looking uncertain. In July, the Bank of England’s Financial Policy Committee published its latest Financial Stability Report, highlighting that SME indebtedness has risen by around 25%, compared to just 2% for large firms.

The analysis suggests that as of January 2021, 11.8% of SMEs in sectors such as food and accommodation, most affected by Covid restrictions, are already in arrears on their outstanding loans or have formally defaulted. Some 5.5% of the broader SME population were in a similar situation in 2021 Q1.

The report warns that if “the economic outlook worsens or should financing costs and debt-servicing burdens rise, SMEs could face further pressure.” Like a lot of countries, more SMEs could find themselves in the red when it comes to cash.

Meanwhile, data from Intuit Quickbooks reveals that SMEs in the UK with at least one overdue invoice are owed £21,373 in late payments in May 2021. The figure represents more than two thirds (67%) of the average SME’s typical monthly turnover.

Put simply, the ongoing challenges facing SMEs should also offer a renewed impetus to consider alternative finance. To SME ears, that might sound like the preserve of tech start-ups or businesses already operating in the financial services space who already ‘get’ the seeming complexities and potential risks. But, alternative finance is any type of business finance that doesn’t come from a mainstream provider like a high street bank.

APIs, Open Banking, invoice financing options, and new financing apps and plug-ins for accounting software have been in rapid evolution for business finance. As such, there are now multiple, viable options for SMEs who need cash fast to grow, plug a gap, or address a late payment issue.

Some of these new financial entrants don’t tie a business into long-term relationships, so it can be used as a stop gap, a finance option or a way to even the cashflow out over a longer period. And because these options are technology-fuelled, it should be a lot easier to clearly compare the benefits of each potential option to find the right one for the business.

But it’s all too easy to get taken in by flashy marketing, slick websites and adverts in papers and around train stations. It either puts small business owners off as a gimmick or leads to making the wrong decision when considering alternative financing options. A smarter way to understand where we are, is to take a step back at three key moments to better appreciate the rise and need of alternative finance.

First, after the 2008 crisis, the banking industry was often forced to turn its back on SME financing through the surge of new regulation and compulsory risk assessments. Following the crash, an OECD study found that banks had “tightened their lending policies” across the board, with SMEs having “strongly reduced their investment projects financed by credit.”

The problem of late payment is faced acutely by SMEs on a regular basis, with some sectors worse affected, as the data cited above shows. The work of the Small Business Commissioner and the Prompt Payment Code are welcomed efforts to fix a serious problem and change behaviour. Still, on a daily basis SMEs can wait prolonged periods past the invoice payment date, leading to pressures on working capital, increased chance of the invoice never being paid, and not to mention the souring of B2B business relationships.

Finally, SME B2B payment problems were exacerbated during Covid-19 lockdowns, as sales dried up, businesses scrambled to retain cash by withholding payments, small operations burnt through their cash reserves, employees were furloughed causing business operations to slow, and supply chains were disrupted. Government loan schemes have helped, but they must be paid back, and cash pressures will continue as businesses look to recover, as Bank of England analysis suggests.

Now, take a step forward into the fast-growing world of APIs and Open Banking for SMEs, peer-to-peer lending, and new options around invoice financing which leverage an investor market rather than a bank or standard invoice financing company.

The alternative finance and fintech market has grown exponentially, with the UK among the global leading lights for investment in fintech, giving SMEs more options as they face this multitude of business pressures.

Big, established SME providers like Xero now come with embedded software integrations, putting these new finance channels at the fingertips of SMEs and their accountants. This deserves more than a cursory glance by the small business owner. A recent survey by the British Business Bank found that over four in five business advisers and accountants think there are gaps in the supply of finance to small businesses, while over three-quarters believe that demand for finance is outstripping supply.

Clearly, it’s time that business owners and their financial advisors look beyond traditional finance options if they are to bridge this gap and weather the storm on the road to recovery. It’s time to consider fresh and flexible financing options, with accountants well placed to be the bridge between the SME and the alternative finance market.

It’s time for the modern SME to realise new solutions are emerging all the time to help them to run their business. These options shouldn’t be dismissed simply because they don’t come from traditional banking providers. They have been specifically engineered to fill financing gaps in the market for businesses – and those owners who don’t at least look into what they could be offering could be missing out on significant benefits.



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