Alternative Finance: The Ultimate Guide for SMEs

Alternative Finance: The Ultimate Guide for SMEs

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The small and medium-sized enterprise (SME) is the backbone of the British economy.

Almost half of the UK’s GDP is generated by SMEs and these firms employ close to 15 million people.

Yet bank lending to SMEs plummeted after the 2009 financial crisis and remains at historically low levels. Between 2013 and 2014, lending to smaller companies by traditional institutions fell by almost £5 billion despite the Government’s pledge to move heaven and earth to unfreeze the market and increase business investment.

Despite net lending by banks growing by £600 million in the first quarter of 2015, the total is still well below the amount loaned to SMEs before the financial crisis. So it is patently clear that despite the uptick in the economy, the banks are continuing to make it difficult for SMEs when it comes to securing the finance they need to invest, grow and keep Britain’s economy moving.

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Statistics from Nesta’s 2014 report  ‘Understanding Alternative Finance’ clearly demonstrate how difficult it is for SMEs to secure funding from traditional sources. Nesta reveals the following stats about SMEs who sought funding from traditional channels before approaching P2P Business Lending – the most popular form of alternative finance with SMEs:

  • Almost 80% of SMEs responding had applied to banks for loans but only 22% had been successful.
  • Nearly 20% had approached government and other public sector bodies for finance but just 2% were lent money.
  • Even building societies and credit unions were unwilling to lend – 13% of respondents had applied to these bodies for loans but the success rate was just 3%.
  • The success rates for SMEs gaining funding from angel investors, venture capital firms and philanthropic sources were more impressive with between a quarter and a half of those taking these routes being successful.

An increasing number of SMEs are turning their backs on traditional forms of finance and seeking funding from alternative sources. The growth has been startling – from just £267 million in 2012, alternative lending to SMEs grew to £1.74 billion last year, a rise of 600%.

Merchant Money has published the Ultimate Guide to Alternative Finance for SMEs, putting together the best resources on these forms of funding and explaining their benefits.

SME familiarity with alternative finance - wide

The guide shows that even though just over half of all SMEs – 56% – remain unfamiliar with any form of alternative financing, the advantages for those firms which do use these methods to invest are clear:

  • The funding is usually flexible
  • Money is easy to apply for
  • There is a higher likelihood that an application will be accepted
  • The terms – both repayments and interest rates – are generally better than those offered by banks
  • Finance is usually available within days or weeks rather than months
  • Firms applying for alternative finance are more likely to find investors interested in their particular area of expertise.
  • Assessments are made on an individual basis – not the credit-score driven, one-size-fits-all approach of the banks

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