The financial crisis and subsequent on-going regulation of the banking sector has created the need for alternative financial intermediary services. SME’s are now beginning to see a far wider choice of ways to raise the equity and debt capital they need to be able to run and grow their businesses efficiently.
The internet has been a major enabler for many of these new initiatives. A consequence of the financial crisis is that traditional savers are also looking for ways to invest as a result of low interest rates.
As a result, online platforms have emerged for peer to peer lending, invoice auctioning, crowdfunding, FX hedging and a number of other financing needs, many of which are actively targeting credit rationed and cost-conscious small and medium-sized enterprises.
While these platforms are still small compared to conventional providers of business finance, they are already serving the needs of many SMEs and there is no reason why they shouldn’t become part of the mainstream.
Crowdfunding is one option which is allowing smaller organisations, which may not be able to secure conventional financing, access to finance.
Organisations such as Funding Circle and ThinCats utilise the internet to bring together individuals who network and pool their money to offer as a loan to SME borrowers. Personal guarantees are usually required against such loans and typical APRs for crowdfunding are around 9-10%.
There are similar options for businesses looking to raise equity finance. Crowdcube uses the same method as crowdfunding, but in exchange for a percentage of the business. It recently completed a deal for Rushmore Group, the London based bar and club operator, selling a 10% stake in the company to 149 investors, worth £1million.
For companies finding access to bank overdrafts increasingly difficult, online platforms such as The Receivables Exchange in the US, and in the UK MarketInvoice and Platform Black, enable businesses to auction their outstanding trade invoices to financial buyers. Normally, a percentage of the invoice is advanced in return for a fee with the debt being repaid when the end-customer settles the final invoice.
This is a way for companies to improve their cashflow and release working capital back into the business, but it has traditionally been an expensive and inflexible means of additional financing. However, the introduction of competitive bidding via the online platforms has resulted in lowering the cost in recent years by between 30%-50%.
It is also possible to issue bonds in a company, without listing them on an exchange, making them similar to a private debt placement. Such bonds do not need to company with UK Listing Authority and EU Prospectus Directive requirements and are illiquid. However, this makes the cost of arranging the bond issue more affordable for SMEs. Finpoint in the UK is a good example of this offering.
ACCA held the Alternative Finance Conference looking at this subject, offering leading companies in the sector an opportunity to showcase their services and business models.
By Rosana Mirkovic, head of SME Policy at ACCA