The way in which SMEs are securing finance for businesses is changing. Recent FSB research has indicated many business owners are now younger, better educated than previous generations and as a group they are starting to have an impact on the way finance is raised for SMEs.
Without the same allegiances to traditional banking and sources of finance, they are using the internet to source potential lenders. Recent research revealed that 73% of the clients of Funding Circle, the largest alternative lenders, would not go back to using a bank even when offered the same facilities.
The H.M. Treasury and Department for Business, Innovation & Skills consultation entitled ‘SME finance: help to match SMEs rejected for finance with alternative lenders’ closed in March this year and the responses are currently being analysed.
This consultation sought views on whether the government should legislate to help match SMEs that have been rejected for loans with challenger banks and alternative finance providers who are looking to offer finance.
As a small business owner, it is important to know how these changes could help or effect your businesses.
Alternative invoice finance
Invoice discounting and factoring have been around for a while and are fast becoming a more ‘mainstream’ source of financing. But there are still only around 43,000 businesses using invoice finance; creating plenty of scope for growth in the market.
Market Invoice has established itself as a market leader. It provides a platform for business owners to register their invoices and allows companies to set the terms wanted for potential investors to bid on a particular invoice.
The business owner is provided with a bank trust account where the transactions takes place, so the debtor is unlikely to know who provides the funding. There are no personal guarantees or debenture taken on the company assets and charges are explicit. No contracts are required to be signed and cash is paid within 24 hours of the auction closing.
Platform Black is fast becoming a challenger to Market Invoice. Platform Black assess each case on its merits, creating scope for sole traders and provides the security it needs. However, like Market Invoice, Platform Black prefers well established larger firms with good Experian rating, government backed companies or Councils to minimise risks within the B2B sector. But they do limit themselves as they are only interested in 30-90 days short term debt, compared to Market Invoices 30-120 days.
Alternative lenders (Debt crowdfunding/Peer to peer lending)
There is confusion in the market around the difference between peer to peer and debt crowdfunding, but practically there is no difference.
Peer to peer is the recognised term for raising capital for business. This market is growing rapidly having grown from £492m in 2012 to lending £1.4bn in the last twelve month. Peer to peer is now scrutinised by the FCA, who provided the peer to peer lenders with guidelines in March 2014.
As entrepreneurs are getting younger and are better educated, it is no coincidence that they are utilising social media such as Facebook, Twitter, LinkedIn and YouTube. A recent study in Illinois found that there was a direct relationship between the use of social media and the success of Peer to Peer.
The market leaders in this sectors are Funding Circle (business specific finance), Zopa (business and personal finance) and Ratesetter (business and personal finance).
Zopa are the largest of the alternative ‘platform’ lenders with £520m in loans. Funding Circle has government backing now and have loaned over £268m to over 4,500 UK businesses. Funding Tree may be more useful if you are looking for ‘start up’ finance which may not be Funding Circle’s core market.
In general, the majority of cases the business owner will benefit from lower rates due to the potential investors bidding on the loan required and of course no middle-men. The loan is usually agreed in a much faster time scale than would be expected by the bank and less supporting information is normally required.
The big downside is that dependent on the ‘platform’ your company may be assessed for ‘risk’ and be allocated a risk rating by the ‘platform’ and competitors may see this.
What will be the shape of the alternative market in 5 years’ time?
I believe the banks will have changed radically focusing more on the B2C relationships, leaving the SME lending to the alternative sector. The banks will undoubtedly cherry pick and no doubt buy the larger ‘alternative players’ and may even dabble themselves, but banking and finance has and will continue to change.
Banking started when local communities decided to get together to fund major projects and this is where it will end and in the process becoming more localised, focused, ethical and charity driven.
Mike Smith is director of Jameson Smith & Co, a business debt specialist. Mike provides business turnaround and insolvency advice and solutions to UK company directors and accountants.
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