During 2014, providers in the alternative finance sector lent £1.74bn to UK firms and individuals, with person to business lending, at £749m, growing at the phenomenal rate of 250%. Other figures, collected by Cambridge’s Judge Business School, show that person to person lending hit £547m and invoice discounting £270m. The overall growth in the alternative finance market, as detailed in the joint Nesta-University of Cambridge ‘Understanding Alternative Finance’ report published in November 2014 is staggering, rising from £267m in 2012 to the £1.74bn figure detailed above. While this is clearly to be welcomed by SMEs struggling to persuade banks to increase their overdraft or provide finance, the sector of the report which detailed awareness of alternative finance makes for somewhat worrying reading in small business terms.
According to the report, awareness of alternative finance amongst the general population is running at 58%, with 14% of those having used it. Within the SME sector, however, only 44% are aware of the sector and a mere 9% have either used or tried to use it. This underlines a major challenge facing the sector; revelling in the sheer size of the numbers involved, and creating ever more innovative tools designed to facilitate alternative forms of lending are all very well, but the key task which lies ahead is clearly one of disseminating information amongst the SME sector – disseminating information and developing trust.
Normalising Alternative Finance
One development which may help to ‘normalise’ the concept of alternative finance is the governments’ decision, announced last year and due to come into force early this year, to lift restrictions on invoice financing. This will mean SMEs are able to access 90% of an unpaid invoice instantly, with the remainder becoming available once the invoice is paid, minus a small fee. With the recent Tesco scandal underlining the catastrophic problems which late payment of invoice can wreak upon SMEs, this move promises to provide a twin boost; helping to minimise the problems of late payment at the same time as highlighting the flexibility and ease of use of a particular form of alternative financing.
Two other government moves seem likely to boost the alternative finance sector further. The first is the plan, initially mentioned in a 2014 consultation paper, to introduce a statutory duty compelling banks which turn down SMEs seeking funding to refer the SME in question to sources of alternative finance. At the moment, this is still a suggestion with no firm date for its’ introduction set, but a move which is definitely being launched soon is the introduction, this April, of the Innovative Finance ISA. Using this tool, investors lending to small businesses via crowdfunding platforms will be able to qualify for the same tax advantages enjoyed by standard ISAs.
Moves such as these mark a recognition on the part of government that alternative finance is here to stay and should be encouraged and given the bedrock of statutory backing if it is to continue driving growth in the small and meium business community. The challenge for the alternative finance sector is to match these moves with a marketing and publicity drive aimed at ensuring no SME remains unaware of the opportunities on offer.
Finance Brokers and Alternative Finance
Given the relative lack of awareness of alternative funding options present in the SME community, the role played by finance brokers in acting as a conduit between lenders and businesses seems set to become ever more vital. Research carried out last year found that there were no less than 108 alternative finance providers operating in the UK, with 17 offering more than one product from a range including invoice financing, loans, equity and bonds. Given that both of these figures are likely to have risen dramatically in the months since, the role played by brokers in guiding business people securely through the somewhat daunting range of options on offer is one which is going to be increasingly in demand. Experienced brokers will be able to source finance for companies seen as too ‘high risk’ for conventional lenders, and will be well versed in the use of methods such as export finance and stock finance, as well as peer to business lending and crowdfunding.
Our Offer To Finance Brokers
Here at Merchant Money we’re doing our bit to boost the sector by offering double commission to any broker who brings us a deal during February and as if that wasn’t enough, we’re also offering £500 cashback to the first broker to bring us a deal.