By Emma Dungey, Head of Operations, Verus360.
As more of the UK’s small-to-medium-sized enterprises (SMEs) turn to alternative finance (AltFi) for funding, the sector is growing at a staggering rate. We have seen a 43% increase in SME AltFi in the last year alone, with £76bn of AltFi currently in use by SMEs, according to research by business finance referral firm, Funding Options.
For business owners who aren’t 100% clear on what AltFi is, it’s an umbrella term for companies which provide access to business capital (and consumer loans) – as opposed to banks.
So, why are UK SMEs turning their backs on traditional lenders in favour of AltFi? SMEs which have used AltFi cite its lower costs, speed and simplicity compared to traditional lending as its main attractions. It’s certainly proving to be a game-changer in the business-lending sector.
And yet, a 2015 YouGov poll found that 42% of UK SMEs still rely on the big banks for borrowing. This is partly due to a lack of awareness and understanding of the AltFi sector as well as a tendency for SMEs to turn to their business bank for finance in the first instance.
What this means is that many SMEs are being starved of vital funds to expand and thrive as traditional lenders’ reluctance to provide business finance since the 2008/9 crash shows no sign of abating. The Federation of Small Businesses says that 35% of SMEs are refused loans by the ‘Big Four’ banks and many do not apply again.
What type of AltFi to choose?
Could AltFi be the answer for your business? With many types of AltFi on offer, the chances are there will be one to suit your business needs. By far the most popular type to date is peer-to-peer (P2P) business lending which accounted for £749m of the UK AltFi market in 2014. Here, a pool of investors (usually private individuals) provides capital for your business loan.
There are even AltFi options where individual investors donate without any expectation of a monetary reward, or receive a physical reward for providing capital, such as free meals for supporting the launch of a local restaurant.
There are pros and cons for each type, which we cover in our free guide to AltFi for SMEs. The new Verus360 guide to AltFi will give you an overview of the AltFi sector, as well as an at-a-glance summary of the nine most popular AltFi funding options, including which companies offer them and how you can access the finance.