SMEs embrace the rise of alternative finance
Gone are the days when SMEs raising finance automatically regarded the bank as their first – and often only – port of call. The development of alternative finance has given growing businesses access to a much broader range of funding options, with flexible and bespoke solutions to their individual needs.
While access to finance was a problem in the wake of the financial crisis, as banks withdrew from lending to SME customers, this has become less problematic in recent times. In fact, the increasing use of other types of business finance reflects a heightened awareness amongst SMEs that they do have funding options other than what’s available from the banks – and also that these new approaches have some particular advantages.
Alternative finance not only includes newer innovations, such as online crowd funding, but also offers options which have been around for many years – invoice finance, for example, which unlocks the value of unpaid invoices, and asset finance, where funding is secured against the value of company assets. This breadth of choice, is part of the explanation for why alternative finance continues to thrive.
Small businesses want finance that is adaptable to their needs, particularly as they develop and grow. Bank loans and overdraft facilities, however, are fixed products that don’t flex as the business changes. Unlike many banking products, no two SMEs are the same. That can cause problems – a loan that may be suitable for one business may not work for another.
Alternative finance arrangements provide funding solutions designed around the company’s individual characteristics – including turnover, industry, stock levels or number of invoices, that's why it may be more suitable for companies that have changing needs over time.
Moreover, SMEs have very positive reasons for considering a wide array of funding solutions; they’re not turning to the sector because they’ve been turned down for credit by the banks – rather, SMEs increasingly recognise that tailored and flexible asset-backed or invoice finance funding arrangements may serve their needs better than a very standard bank loan or overdraft.
With support from SMEs that already see the sector as offering a competitive product, the rise of alternative finance looks set to continue.