It’s no big secret that SMEs have found it incredibly difficult to access funding from traditional lenders and big banks in the wake of the 2008 financial crisis. But what now, with economic growth remerging, will banks return to lending to SMEs as they did before?
Unfortunately, the simple answer to that question is no.
Banks remain largely risk averse even as SMEs across the UK see prospects for growth returning and good reasons to invest for future. But rather than letting opportunities pass them by, more and more are turning to alternative sources of finance when traditional routes to funds remain blocked.
Here are 4 of the most popular emerging finance options helping UK SMEs:
1 – Using assets
Asset refinancing is ideal for SMEs that are struggling with cash flow problems while having capital tied up in high value assets, such as heavy machinery or a fleet of vehicles. The process essentially involves a company selling and leasing back equipment or assets of value that a company owns in order to free up funds in the short term.
On the other side of the equation and for SMEs that need quick access to specific tools, vehicles or equipment, asset finance can be a viable and attractive option. The process is as simple as leasing specified assets at a price agreed by all relevant parties up front and it allows SMEs to pay for large and important purchases over extended periods rather than in one fell swoop.
2 – Invoice finance
Another means of raising funds and easing cash flow concerns as an SME is invoice factoring and invoice discounting, both of which allow companies to raise cash essentially by selling the rights to money they’re owed for a fee.
In the case of factoring, the purchaser of an invoice takes up responsibility for ensuring payments are received, which can be good news for small companies who can then focus on winning new business and meeting existing customer demand. Invoice discounting is very similar to factoring but with the distinction that a company remains responsible for chasing up payments after an invoice is sold.
The key issue to balance for SMEs considering using invoice finance is whether an immediate cash injection might be of greater value in the longer term than holding on for customers to make payments at an unknown point in the future. So a small company in crisis, for example, might turn to invoice financing as a solution when other alternative routes to funding are simply not available.
3 – Crowdfunding
Many of the growing trends in the context of alternative funding for SMEs have been made easier by purpose-built online platforms – and crowd funding perhaps more than any other. The process is based on bringing businesses, ideas and investors together online and typically involves contributors taking a small equity holding in small-scale businesses.
Technology startups and digital enterprises are particularly well placed to benefit from crowdfunding as an alternative means of raising finance because they are often able to generate great optimism and hype among investors. However, crowdfunding is also emerging as an appealing route to finance for well-established companies struggling to find funding through traditional means.
Among a growing list of crowdfunding success stories are the company behind the intelligent email system Fantoo, which raised £450,000 before its launch in late 2013, and the virtual reality startup Oculus Rift, which was bought by Facebook for $2bn earlier this year.
4 – Community development finance institutions
Community development finance institutions (CDFI) have emerged in response to difficulties that community groups and small businesses have had in securing finance from banks and traditional lenders in recent years.
CDFIs exist as social enterprises and they are designed to offer affordable credit to organisations that have few alternatives in terms of funding options. Typically, the work of CDFIs is focused on providing essential financial services and lending facilities to SMEs that serve a local community in important ways rather than those simply looking to grow and make big profits.
There are now dozens of CDFIs operating across the UK and hundreds of SMEs are turning to them in response to acute cash flow problems and in order to secure small but much-needed loans at affordable rates. The institutions are not charities but they are designed to be approachable and flexible in the way that they operate and lend money, with the focus very much on helping companies that have been refused credit by banks.
Getting the right advice
Alternative sources of finance are becoming an increasingly common part of the SME landscape in the UK and elsewhere in the world. There is great potential in the industry and innovative finance solutions are helping to fuel the growth of small businesses across a huge variety of sectors.
What SMEs leaders ought to have in mind however as they seek out alternative routes to finance is that there can be unexpected complexity involved and expert advice can be invaluable.
Find more information on Conrad’s website