Currently, business is booming for SMEs. Last year, 23 million small and medium sized enterprises (SMEs) across Europe managed to generate €3.9 trillion in value and employed 90 million people, meaning indicating SMEs are beginning to form the backbone of the European economy.
However, more than 60% of SMEs are concerned with their ability to finance long-term growth and banks are gradually becoming more reluctant to approve loans to smaller organisations. This means that the need for accessing vital funds elsewhere is becoming crucial, which is why more businesses are choosing alternative finance as a lending substitute.
Whether it’s through peer-to-peer lending, crowd funding or a merchant cash advance, alternative finance has provided SMEs with access to a wider variety of affordable and flexible financial solutions. With alternative lenders providing more funding to SMEs than ever before, here are 17 facts about alternative finance in 2017.
1) The UK is at the centre of the European alternative finance sector which grew 84% last year and facilitated £3.2 billion in investments, loans and donations
A report conducted by innovation foundation Nesta discovered the European alternative finance sector achieved substantial growth in 2016 that was up 84% on previous years. According to Nesta, the alternative finance sector is “bigger than ever” and is becoming “more sophisticated than ever, building out an infrastructure including risk, compliance and legal teams to support this growth”.
2) The UK alternative finance sector is predicted to be worth £12.3 billion by 2020
A report conducted by financial services technology providers Fiserv suggested that SMEs are likely to benefit from the substantial projected growth of alternate sources of funding such as peer-to-business (P2B) lending and crowd-funding over the next five years.
Travers Clarke Walker, CMO of Fiserv, commented: “Our research suggests that improved and user-friendly technology is impelling the growth of alternative finance in the U.K. We have seen the P2B and crowd-funding sectors engaging in a concerted marketing push, which is likely to raise awareness significantly. The buzz around alternative finance for SMEs is giving alternative financiers legitimacy and encouraging SMEs to try these alternative funding options”.
3) 52% of SME owners are now aware of finance options beyond traditional banking
Gone are the days when SMEs raising finance automatically regarded the bank as their first – and often only – option for obtaining necessary funding. The development of alternative finance has given growing businesses access to a much broader range of funding options with flexible and bespoke solutions tailored to their individual needs.
SMEs are not just turning to the alternative finance sector because they’ve been turned down for credit by the banks. They are increasingly recognising that tailored and flexible asset-backed or invoice finance arrangements may serve their needs better than a standard bank loan or overdraft.
4) According to Shelbourne Financial, Peer-to-peer lending is the largest market segment of alternative finance, with €366 million recorded in Europe
If businesses need to obtain finance, peer-to-peer (P2P) loans are significantly cheaper compared to banks or building societies, especially if the business has a good credit rating. In addition, some lender’s websites do not have a minimum loan amount in contrast to the majority of traditional funding methods. Through P2P lending, you can gain access to finance more speedily.
For instance, a bank might take weeks before the money you need is accessible, whereas with P2P lending, you might gain access to your funds on the same day you applied for them. However, it is important to remember that your credit rating will ultimately determine whether your business is eligible for this type of finance.
5) The average deal size in crowdfunding is now approximately €459,000 in the European sector
In comparison to applying for a loan or seeking out sustainable investing yourself, creating a successful crowdfunding campaign is significantly more effective at getting your message out to the right people. It is also an opportunity to refine your product or service further – one of the greatest things about crowdfunding is how close it gets you to your customers, giving you a chance to engage with them and field questions, complaints, feedback and ideas.
6) The equity-based crowdfunding sector has grown by 295% from £84 million to £332 million since 2015
Though funding is almost always the main goal of equity-based crowdfunding – the process where people invest in an early-stage, unlisted company in exchange for shares in that company, it is also a fantastic way to gain visibility, validate your business, grow your customer base and more.
Crowdfunding doubles as marketing and as a means of media exposure: for press coverage (news stations, blog posts or print publications) will increase the exposure of your campaign and therefore create lasting brand awareness for your business
7) Retail and Wholesale was the most funded sector for peer-to-peer lending globally in 2016
Considering the combined debt and equity-based funding for property amounted to almost £700 million in 2016, it is no surprise they were labelled as the most funded alternative finance industry sector across the range by Nesta.
Out of all the alternative finance methods available, a merchant cash advance is one of the most suitable choices for retailers. Whether retailers are looking to refurbish their premises, launch the latest product line or purchase new equipment, a merchant cash advance is a quick and simple way to raise funding without stretching an overdraft. It is an idyllic solution for retailers who do not possess many assets but have a good volume of monthly card transactions.
Merchant cash advances are repaid flexibly via a pre-agreed percentage of future card transactions meaning it doesn’t interrupt cash flow, as businesses only pay back as they earn.
8) There is now a high degree of automation in peer-to-peer lending
According to a study conducted by the Cambridge Centre for Alternative Finance, 82% of consumer loans, 78% of traded invoices (i.e. receivables) and 38% of business loans are now funded by automatic selection or automatic bidding processes on European alternative finance platforms.
Automatic bidding can enhance market efficiency as both the lenders and SME borrowers know the applicable interest rate with a greater certainty. Overall, automatic bidding is challenging P2P business lending platforms to constantly improve their own underwriting and credit risk management capabilities, as the platform must now make loan selections on behalf of the lender.
9) Online alternative business funding has increased considerably
€536m was raised for over 9,400 start-ups and SMEs across Europe in last year; up 167% year-on-year from the total of €201m in 2015. Additionally, 20,000 SMEs raised alternative finance through online channels last year.
10) Merchant cash advances are projected to reach $15.3 billion for US SMEs
According to research from PYMENTS, the volume of merchant cash advances provided to U.S. SMEs has steadily increased over the last few years which is largely attributed to the economic changes in the country.
However, the market for this short-term financing solution is currently shifting. As regulation evolves to adapt to an influx of SME lending products and technologies, banks have implied that the regulatory authorities could change the way merchant cash advances are overseen in the US.
BPC CEO and Managing Partner of Bryant Park Capital, Joel Magerman, explained: “Given the structural shifts with traditional large banks retreating from small business lending, merchant cash advance companies and other small business lenders have stepped into this void making capital to small businesses available at great speed and efficiency, albeit at a higher cost of capital, enabling them to do so profitably”.
11) 68% of SMEs are planning on taking out business finance in 2017 (Liberis)
Considering there are 80 new companies founded every hour, the demand for SMEs to stay competitive is becoming more essential. However, with banks becoming more reluctant to approve loans for new companies, SMEs are choosing to take out alternative finance solutions instead. By using the most applicable source of alternative finance businesses can strive towards launching new products and expanding or increasing their marketing to ensure they are maintaining a competitive advantage.
12) 50% of SMEs will be raising finance with the intention of expanding their business
Whether funding is required for opening up additional stores in new locations or investing in new projects, it is evident that obtaining additional finance is essential to assist SMEs with achieving their expansion goals.
13) 25% of small firms that apply to banks have their loan application rejected
The British Business Bank plc estimates that approximately 100,000 small and medium-sized business loan applications are declined by banks, each year amounting to a possible funding gap of £4 billion.
Inevitably, small businesses often require access to capital for a variety of costs, such as purchasing new equipment, carrying out refurbishments, hiring more staff or investing in marketing. However, if a business’ application has been rejected by a bank, it will undoubtedly leave them concerned over their future if they can’t finance these necessary expenses.
Alternative finance can offer businesses the perfect solution for obtaining this necessary funding. Use a business loan calculator to find out how much your business is eligible to apply for.
14) More than 60% of SMEs are concerned with their ability to finance long-term growth
Thankfully, SMEs who are refused loans by banks are being offered a second chance through a scheme implemented last year which is aimed at boosting lending to companies whilst breaking the dominance the Big Four banks (Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland Group) possess over small business loans.
The scheme, which went live in October 2016, will push small firms towards alternatives such as peer-to-peer lenders, according to industry sources. Nine banks are now required to provide firms rejected for finance the opportunity to have their applications passed onto either Funding Xchange, Business Finance Compared or Funding Options.
15) 80 to 90% of small businesses fail because of poor cash flow
These cash flow problems are typically stemming from systemic late payment from customers that inevitably trickle down the supply chain, or from a lack of quick access to finance. Furthermore, 55% of small businesses find cash flow their biggest obstacle for achieving success whilst more than 40% indicate an increase in working capital needs compared to last year. With the flexibility offered through merchant cash advances, business can begin bridging their cash flow, for the funding will be paid back as they earn.
16) Hotels and B&Bs are looking to borrow £100,000+ for upgrades to bedrooms and service
This figure suggests the hotel and B&B industry is one of the most likely to undertake more extensive work, perhaps because more comprehensive upgrades to bedrooms are needed in order to make improvements worth advertising in the business’ marketing strategies.
17) Business overdraft lending by banks is down 50% in four years
It is becoming apparent that businesses are not receiving the financial support they require from banks. Many businesses have resorted to retaining deposits to survive dips in cash flow meaning they cannot reinvest profits which are reducing and affecting growth and levels of employment. Punitive interest rates only add insult to injury.
Research from the accounting firm Kingston Smith revealed a communication gap between lenders and SMEs which has produced barriers over the years. Paul Samrah, a partner at the firm, explained this disconnect is largely between the understanding that banks and entrepreneurs have about one another’s needs and processes:
“Many entrepreneurs appeared unaware of banks’ lending criteria, and the need to have a good credit rating and a realistic business plan. Meanwhile, the feedback and support that banks offer entrepreneurs following their loan decision is often unclear and inadequate,” he says. “Bankers often don’t have the knowledge or experience to actually help businesses. Clearly, this mutual lack of understanding can result in significant barriers to SME lending”