30 Oct 2012 04:30pm

Beyond banking

When traditional finance isn’t available, entrepreneurs need to get creative. Anil Stocker picks his way through the alternatives to borrowing from the banks

Over recent years, the media has been full of stories about banks not lending to small businesses. The figures bear this out – market research firm BDRC Continental’s recent SME Finance Monitor found a third of business loan applications were turned down and a fifth of overdraft applications met the same fate.

Stepping into the gap are a number of innovative companies providing new funding options by using technology to deliver finance. Peer-to-peer lending (P2P), online invoice finance and crowdfunding are often referred to under the umbrella term "alternative finance". It’s common for the media to confuse their functions but different types of alternative finance suit different business needs.

The Next Generation Finance Consortium (NGFC) promotes awareness of what the alternative finance sector can do. It aims to provide insight and advice into the different methods of non-bank finance and start bridging the gap between high-growth businesses and investment. It was also established to create a link between new and traditional lending models to ensure businesses can find the right type of finance for their needs. It’s important to understand that banks will always have a central role in providing finance to commercial customers – alternative finance companies won’t replace them.

Being in the right time and place when starting could be luck. But successful entrepreneurs put themselves in that position

James Eder, the Beans Group

There’s no single solution or silver bullet outside the banks for all business finance; each of the options explained here serves a different purpose for a different type of customer. Put together they are able to offer lending solutions at every stage of a business’s life.

Peer-to-peer lending

Peer-to-peer lending is a process driven by advances in internet technology in the last few years. It allows individuals to lend money directly to SMEs, facilitating financial transactions between individuals without the need of a traditional financial institution intermediary; so retail investors come together to lend money to businesses, for example.

Peer-to-peer lending is a counterpart and equivalent to traditional bank loans. It isn’t really appropriate for start-ups, and is more for SMEs in need of traditional debt finance. The advantages are that the process is usually much faster, requires less tedious paperwork than a traditional bank loan, and lenders will take on many businesses that have been rejected by traditional banks.

Typical example Funding Circle, a UK P2P website. It has provided almost £50m in funding to UK SMEs in the last two years.

Best for Established businesses looking for a loan without the hassle of going through a bank.

Example of a business using it Ground Coffee, an award-winning coffee shop in Brighton, raised £40,000 to expand its premises. The money was sourced from 200 investors at a rate of 8% APR.

Online invoice finance

Online invoice financing raises money by factoring in a long-existing type of asset-based finance that allows businesses to raise working capital through the selling of debtor invoices. Businesses can obtain cash with factoring and other forms of invoice finance, rather than waiting out the long payment terms large customers demand, commonly between 30 and 90 days. These traditional forms of invoice finance have a bad reputation: lack of transparency, high fees and demanding onerous guarantees.

With improvements in technology, the industry has been revolutionised by innovative online marketplaces for invoices (almost like eBay for corporate finance), which enable UK businesses to grow by "selling" invoices to a global network of professional investors, via online auction. Businesses receive cash overnight, with no onerous lock-ins, personal guarantees or debentures.

Compared with a loan, online invoice finance is much less of a long-term commitment, less collateralised and more scalable. These new marketplaces connect SMEs in need of working capital to professional, institutional investors.


Amount provided for UK SMEs in last two years by Funding Circle

Typical example MarketInvoice, my own company, which has channelled £25m to over 100 UK businesses with turnover ranging from £500,000 to £20m.

Best for Businesses with blue chip customers, who need working capital to finance expansion.

Example of a business using it Connected Pictures, an award-winning multimedia production company with blue-chip clients taking between 90 and 120 days to settle invoices. The company has regularly auctioned invoices to obtain instant cash of up to 85% total invoice value, with fees as low as 1.25% of invoice value.


Whereas peer-to-peer lending and invoice finance are for more established small and medium-sized businesses, crowdfunding is a great option for start-ups. Indeed, very few banks are willing to lend seed capital to new businesses. Crowdfunding websites used to focus primarily on social ventures and creative industries (the prime example of the genre is the US website Kickstarter), but the idea of gaining finance from a number of individuals has now entered the mainstream.

This is where equity crowdfunding comes in. Equity crowdfunding is the process of receiving funding from many different small investors in return for tiny portions of equity; very similar to a traditional angel investor model but expanded for the social media generation. Online crowdfunding facilitators give investors the chance to buy micro-size slices of equity in start-ups. While it can take a while to secure funds, crowdfunding has the benefit of giving SMEs access to a much wider pool of investors and the expertise that comes with them.

Typical UK examples Crowdcube, a website launched in 2010, has helped 21 entrepreneurs raise £3.7m. Seedrs, launched earlier this year after receiving FSA approval, funded three businesses within its first month of business.

Best for Pre-revenue start-up businesses looking for seed capital.

Example of businesses using it  Escape the City, a business aiming to help ambitious professionals make career transitions, raised £600,000 for 24% of their company through Crowdcube. PlayBrighter, a Welsh start-up making educational games for classrooms, raised £30,000 for 8% equity from Seedrs.


Anil Stocker