Born in the United States of America, the alternative finance revolution has landed on our shores in the last couple of years and raising finance for the SME will never quite be the same again. It is forecast that by the end of 2015, the alternative finance market place will have issued new loans of well in excess of £4 billion.
Gone are the days of going cap in hand to the business banker clutching armfuls of finger in the air financial projections produced, at cost, by your accountant. Gone also are the days of waiting interminable amounts of time jumping through endless banking hoops whilst our “local” banker presents funding cases to far flung decision makers. Gone are the days of being forced to proffer more and more personal security to support the funding requests of a growing company.
With the SME denied the help of traditional banks, largely due to the outcome of the 2008 crash and the impact of the Basle Accords on bank liquidity ratios, but with demand for vital sources of working capital still there, the number of alternative finance providers ready to plug funding gaps has grown apace.
Businesses come in all shapes, sizes and hues and, as a consequence, every business has its own unique funding requirements. Alternative finance providers have emerged to focus on specific segments within the SME funding mix. This is great news for the SME exploring its funding options, but the myriad of potential solutions does create its own challenges and the plethora of new players delivering multiple options can make it somewhat overwhelming for the uninitiated to tread a well planned path through the maze of new finance providers.
As specialist altfi finance brokers, we at Genie Lending are bound to say that it is best to employ the services of a NACFB accredited broker and one with dedicated understanding of the altfi marketplace, but our aim here to give a very brief overview of what’s out there for the SME.
Peer to peer business lending – debt transactions between individuals and / or institutions facilitated by a platform. Many individual contributors make up the sum ultimately borrowed with terms between 6 months and 5 years typical. Interest rates can vary from as low as 9% or as high as 18-20%, dependent on the quality of the proposal. Funds can be delivered in a matter of a week or so in some instances with potentially very little in the way of business plans / budgets being required. With many platforms in the market, it is essential to work with a platform that will accept the credit risk of your business and present your funding proposal to potential lenders. If going down this route, do your homework as the character of each platform is very different.
Equity based crowd funding – as implied, the sale of a proportion of your business to a number of individual and / or institutional investors in return for investment. Again, there are a number of platforms who facilitate these types of transaction and they each are different in nature and what type of deal they are looking to propose to their investor base.
Invoice trading – the time when a company was obliged to hand over the whole of its debtor book to a factor or invoice discounter is long gone as is the time of restrictive contracts from which it is prohibitively expensive to escape. For companies trading on credit terms with their customers, it is now possible to sell invoices on in a selective manner, entirely at the SME’s discretion, to a pool of individuals or institutions again through a funding platform. Funds are then received immediately to a pre-defined percentage of the invoice’s value with the balance less fees being received at invoice collection delivering instant cashflow from working capital tied up in unpaid invoices. Structures also exist that enable 2 or 3 year loan arrangements, either fully amortising or bullet repayment, driven by the value of the SME’s debtor book.
Specialist working capital lending – perhaps the most active space in the market at present with a number of new non-bank funders having entered focused on the provision of quick and easy, light touch working capital and expansion loans in the shorter term, typically 6 months up to 2 years. With many players occupying this space, there are subtle and, to be fair, not so subtle, differences in each lender’s proposition.
Trade finance – where current working capital does not allow but the SME has a committed order from their customer, it is possible to facilitate a finance structure driven entirely by the transaction itself. Trade finance is amongst the most rapidly growing forms of finance today.
Pension led funding – mechanisms which allow SME owners to use their pension funds to invest in their own businesses within a HMRC approved and potentially tax efficient environment.
To summarise, alternative finance solutions can deliver fast and flexible funding for a very wide range of SMEs on keen terms within a generally very straightforward “easy” application process.
Geoff Cooney, Genie Lending Limited