27/02/2012

By Joseph Weir, MarketInvoice Limited

Alternative finance has become an increasingly hot topic for business’s today, as traditional solutions to cashflow problems have become less viable.

Since the 2008 global financial crisis and attendant credit crunch, business owners have regularly found themselves squeezed between banks offering restricted lending, and blue-chip clients who are less likely to pay invoices on time.

According to BACS figures late last year, over half of UK small to medium sized enterprises (SMEs) were awaiting large payments, with the total amount owed totalling over £33 billion. This squeeze on business is a serious issue; if growth in this sector is jeopardized recession will be a lot harder to escape.

UK SMEs represent a huge chunk of UK productivity; they account for over half of the total GDP and 60% of jobs. For this reason it's essential that they have appropriate financial support in order to grow, and in order that they can help lift the economy out of a possible double-dip recession.

The government has recognised the problem, and the banks have been under significant pressure to increase their lending to UK businesses. George Osborne's Project Merlin initiative aimed at setting targets for bank lending to small businesses, in order to ensure that the sector continued to receive appropriate support.

We learned recently, as the Q4 data was released, that its success has been limited. The data revealed indicated that the banks had collectively fallen over £1 billion short of their £76 billion target. The truth for many small business owners is that traditional institutions simply aren't able to provide the kind of support necessary to nurture a buoyant business culture.

The bright side to all this financial doom and gloom has been the growth in the popularity of alternative finance. The last few years have seen the emergence of a number of innovative businesses aiming to provide alternatives to traditional sources of finance to make up the shortfall left by the banks. If we are able to channel funds from previously untapped sources into business, it’s argued, we will be able to protect growth. Some fascinating enterprises are making a success out of doing just that.

One such company is MarketInvoice, an online platform allowing SMEs to auction off unpaid invoices to raise short-term capital. Sellers select an invoice to sell and submit it to MarketInvoice.com, where buyers composed of investors such as hedge-funds, asset management companies, and high net-worth individuals, bid in real-time to acquire the invoices at attractive returns.

The system is quick and efficient, and carries few of the negatives associated with invoice factoring; it is confidential and cost-effective. Founded by Anil Stocker and Charles Delingpole in February 2011, last week it passed £6 million in volume of auctioned invoices. Stocker believes the platform’s success lies in its “we’re able to provide quick and easy access to cash at a time when the banks are simply unable to do so. We can help small businesses avoid the squeeze.”

Another company, Crowdcube, is aiming to offer an alternative solution to the problem of finding equity finance. Founded in 2010, Crowdcube presents a new way to fund start-ups and the expansion of existing businesses, with a platform on which entrepreneurs can raise venture capital from the public.

Thus far, Crowdcube has raised over £2.3 million for start-ups using its service, and, like MarketInvoice, has garnered a lot of positive attention from the mainstream press. Crucially, in both cases we see that the key innovation is channeling previously untapped sources of capital into the business market, taking some of the pressure off traditional institutions.

Lately the Coalition Government has begun to take notice of the potential role that alternative sources of finance could play in the rebuilding of the UK economy. December 2011 saw the announcement of a taskforce led by business secretary Vince Cable, which aims to investigate emergent innovations providing alternatives to bank lending.

Cable underlined that he wanted to ensure that there was a competitive marketplace for lending, in order to provide a range of possibilities for business owners looking for funds. It is to be hoped that any policies emerging from the new budget in March avoid crowding out disruptive and potentially revolutionary new businesses. A lot of the government’s problems with funding for SMEs would be solved much easier by turning to the alternatives, rather than aiming to impose quotas on the struggling banks.

Hopefully in the near future the UK lending landscape will be very different, and the financial needs of SMEs will be catered for by a variety of institutions. Such change would likely be a very good thing for the UK economy.


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