Has alternative business finance gone mainstream?
The 2008 credit crisis had a seismic effect on the way smaller firms secure financing from mainstream lenders. New stricter banking regulations made it harder for small firms, particularly those with fewer assets, to access capital.
This allowed alternative finance to emerge, since fast-growing asset poor firms could now access unsecured funding with semi-automated credit decisions that provided more speed and flexibility compared to traditional finance.
Today alternative finance application forms tend to be professional, straightforward and can be completed online, providing a simpler and speedier process than many mainstream providers. There is often no need to wade through red tape, undergo rigorous due diligence or produce an in-depth business plan. So – as predicted by Nesta – is this the year that alternative finance goes mainstream?
Research would certainly indicate so. Amicus, a specialist lender, recently interviewed small business owners and revealed that more than half (53%) expected demand for alternative finance, including forms such as property finance, crowdsourcing, invoice finance and asset finance, to increase over the next two years.
Small firms predict demand for alternative finance will increase by an average of 28% over the next two. 51% of small and medium sized enterprise owners said they have used or considered using alternative finance, up from 42% in last year’s survey. The most popular option, considered by 47% of respondents, was crowdsourcing finance, including peer-to-peer lending and crowdfunding.
The most recent Nesta Report revealed that equity-based crowdfunding is the second fastest growing alternative finance sector behind donation based crowdfunding. Indeed Seedrs, the UK’s number one equity crowdfunding platform and recently named Britain’s most active investor in private companies, has helped more than 350 businesses of all sizes use its platform as an efficient source of untapped capital.
People have used the platform to invest with ease in exciting early stage companies, looking for interesting companies to invest in as part of building a diversified portfolio of high risk, growth focused investments. For the entrepreneur, in addition to accessing capital, the other real benefit is the marketing opportunity and the chance to engage with prospective consumers.
Albion Ventures, one of the largest independent venture capital investors in the UK, releases an annual Growth Report which is designed to shed light on the factors that both create and impede growth among over 1,000 small and medium sized enterprises.
It recently highlighted that mainstream loans and overdrafts as a source of external finance for small firms have continued to fall in popularity, down to 49% from 76%. The popularity of using third party equity or other long term finance soared from 6% to 34% and a third of firms would consider raising external equity finance.
Businesses borrow for a variety of reasons and when times are difficult, financing can also help to alleviate cash-flow problems and make day-to-day operations run a little bit more smoothly. Some will specialise in specific business sectors, enabling them to understand a client’s requirements and the challenges they face in their industry.
In 2015 the alternative finance market was valued at more than £3 billion representing an 84% increase compared to the £1.74 billion in 2014, according to Nesta. Accessing any type of capital is hugely important for a small business and alternative finance is a wide and fertile landscape but it is immature. As such, the risks can be higher. The increasing number of providers that look to enter the market could put it at risk, but many believe that this will simply sift out those unstainable platforms and boost the more reputable lending platforms.
As the sector becomes mainstream, there is a crucial role for PR to play in educating not only capital thirsty businesses but also return hungry investors. As with any immature market, it will take time and a coordinated effort to receive the credibility stamp of approval.
Alternative lending providers have a real story to tell and through effective communication, can reach a wide and receptive audience. Whether it’s new and innovative fundraises, interesting industry research or original white paper reports, all will have a role in positioning the sector in the right way. The small business and entrepreneurial environments are thriving. A healthier, more technologically advanced economy has meant that it has never been easier to start a business and coupled with more investment-led/pension free investors, could provide an ideal feeding ground for alternative finance.
alternative business finance, alternative finance, alternative lending, business, Communications, Finance, Investment, PR