Why is alternative finance becoming so popular?

Despite the recent good news about the UK’s economy, banks still remain reluctant to lend to SMEs. Whether you are looking to start up, grow or sustain rapid growth, getting finance is nearly always harder than you think. However, SME’s still have plenty of options to source those elusive funding solutions. New Research by Bibby Financial Services has found that as many as one in three businesses are considering alternative finance with 20% saying that their current finance provider is “inflexible”. One of the many routes businesses that fall short of bank’s lending criteria can use to source finance is Crowdfunding.

Broadly speaking there are 3 categories:

Debt Crowdfunding

Investors receive their money back with interest on a traditional term loan arrangement. Also called peer-to-peer (p2p) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in.

Equity Crowdfunding

People invest in an opportunity in return for an equity stake in the business. As with other types of equity-based investments, if a venture is successful the value of the shares go up. If not, the value goes down. This route is particularly beneficial to new start or fast-growth companies that do not have the balance sheet strength or financial track record to enable them to raise debt

Donation/Reward Crowdfunding

This category of crowdfunding appeals to altruistic donors. Individuals will contribute to a project because they believe in the cause and want to help. Rewards such as free memberships, tickets, VIP privileges etc are sometimes offered to investors (hence why this category is often referred to as reward crowdfunding).  Donors usually have a social or personal motivation for putting their money into a project and expect nothing back in return.

In addition to Crowdfunding there is a range of other sources of alternative finance including:

  • Local Authority Loans. Some local authorities have their own loan and equity funds which they can use to support local businesses (financebirmingham.com, www.finance-yorkshire.com).
  • Community Development Finance Institutions (“CDFIs”) lend on an unsecured and secured basis to local businesses that have been declined by their banks (cdfa.org.uk).
  • Unsecured Loan providers will selectively assist businesses that require short-term funds of typically up to £50k. Rates can be high, however.

Asset Based Lending (“ABL”) such as Invoice Finance, Stock Finance and Asset Finance is now viewed as a completely mainstream way of raising business finance and I will go into these in more detail in future blog posts.

Alternative finance is a truly powerful instrument for some businesses to overcome economic challenges and realise their potential. Partner Commercial Finance can help you and your business to make the most of the options available to you talk to us today.

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