Ask businesses about their problems and the big issue stopping many in their tracks is funding.
Major complaints include a lack of flexibility from banks, the length of the loan application process – which means those that aren’t successful often spend many wasted months in limbo – and a shallow funding pot.
But instead of relying on a change of heart by banks on the Funding for Lending scheme – which was designed to help free up extra cash for SMEs – businesses are getting creative when it comes to sourcing capital; more than 60 per cent of small business owners have now used alternative finance or plan to in the future, new research by specialist Funding Knight has shown.
Heirlooms: Borro allows creditworthy firms to take out loans against valuable possessions
Graeme Marshall, chief executive at FundingKnight, which connects businesses with those that want to invest, said: ‘The future funding landscape is set to be extremely diverse, with positive signs that it will spark not only growth but also confidence in SMEs.
‘We firmly believe that alternative methods of funding, such as crowdlending, are set to become a mainstay of business growth in this country.’
Fiona Neville, who owns Fobellita’s Vintage Toy Emporium, first heard about alternative lending platform Borro in a Sunday supplement.
She has now used it twice to buy £30,000-worth of stock for her online enterprise, which sells vintage toys like lead farms, zoos and cars from the 1920s via eBay. Fiona managed to secure the loan against two antique broaches and a painting.
Fiona Neville: Business owner
Paul Aitken, CEO and founder of Borro, has lent money to firms against items such as an inherited pearl necklace and an emerald ring passed down to one director from her great grandmother.
He says: ‘The availability of credit for the country’s SMEs is sorely lacking, and despite government schemes to stimulate lending it’s been a sadly lacklustre effort to support what should be the lifeblood of our economy.
‘Only 40 per cent of British SMEs applied for credit in the past 12 months, showing that confidence among business owners needs a real boost in order for new opportunities to be seized, which will undoubtedly stimulate growth.’
Hugh Barker, CEO oficomply limited, which provides software for integrating CCTV and security applications, was able to maintain vital cashflow in his business using Platform Black, an alternative funding service that hosts asset based finance transactions between investors and firms, when banks turned their backs.
Companies like Platform Black allow small and medium-sized businesses to use the power of crowdfunding to unlock the money tied up in their unpaid invoices. Businesses auction outstanding invoices to investors, who advance 80 to 90 per cent of the money for a fee.
Hugh said: ‘We’ve been trading since 2007 and have a good customer base with local authorities and large corporates. We have also now expanded in multiple overseas jurisdictions. There was no meaningful help available from the Government to assist us in doing this.
‘In addition, the retail banks were unable to help us as they couldn’t understand our technology and were not prepared to take any risk on their books, even when the Funding for Lending Scheme money applied to minimise their risk. If it wasn’t for the alternative finance providers such as Platform Black, we’d be dead in the water.’
‘CROWDFUNDING HELPED ME TO MAKE £1.2 MILLION CHRISTMAS TURNOVER’
Savvy: Paul Huckstepp made more than £1million from Christmas decorations
Paul Huckstepp launched his small business, Mail Order Online, after he spotted a gap in the market for buying and selling products in bulk to quickly take advantage of spending trends.
A typical example of what he does is buy Christmas decorations in bulk from China in the run up to December and sell them for a profit via eBay and Amazon. His idea is a prime example of a business plan that’s simple yet effective; in 2011-12, Paul sold £866,000-worth of Christmas decorations.
But despite its success, the team was still struggled to find the funding they badly needed to capitalise on profits and boost returns – until they hit upon crowdfunding.
Paul explains: ‘The next year, in the run-up to last Christmas, we decided to use the previous year’s data to work out which products sold best, and stock only those. In order to get the stock, we needed a short-term loan for three months to buy in bulk from China.
‘We approached our bank, but the bank didn’t feel that the company had enough trading history – despite the company having already repaid two loans (£250,000 and £80,000) and increased our profits six-fold in the last year with a turnover of £1.3m.
‘I did some research into peer-to-peer lending and realised that it could be a good way to get the funding we needed – matching our company up with investors who want a good return on their money, cutting out the bank as a middleman. There are several P2P platforms out there, but I liked Assetz Capital’s approach: they help you through the process and we spoke to the same people throughout, rather than being passed from person to person, or worse still, dealing with automated systems.
The whole process took a couple of weeks, rather than months. We received £180,000 in October 2012 and repaid in full in December 2012. Costs included a £4,000 arrangement fee and £23,000 of interest. We also provided security to protect Assetz Capital’s lenders: this came in the form of a debenture and first legal charge over the home of one of the directors.
‘Over the Christmas sales our average transaction rose from £28 in 2011 to £31 in 2012, which saw us process in excess of 40,000 orders over a 12 week period, with a turnover of more than £1.2million.
‘Put simply, it allowed us to take advantage of a fantastic opportunity for our business. Without access to funding, we simply wouldn’t have been able to purchase the stock we needed.’
Should you consider alternative finance for your business?
According to the Funding Knight research, two thirds (66 per cent) of SMEs report that they are in need of funding to grow, while a Platform Black survey shows that the overwhelming majority of SMEs (89 per cent) are concerned about how they might be able to expand their business next year without the access to necessary cash.
Although the figures differ, it is clear that funding is at the forefront of small firms’ minds as the economy improves and they compete in an increasingly buoyant market.
However, although alternative finance as an industry is emerging into the mainstream – as the Funding Kinght research shows – it remains an unregulated industry, which mean there is greater potential risk for lenders and borrowers.
Money: Business owners say they are in need of better access to funding
New alternative lending platforms are springing up almost monthly as businesses and investors look away from the banks to find access to funding or better returns on savings.
Some established firms such as Funding Circle, Zopa and RateSetter are self-regulated by the Peer-to-Peer Finance Association and consultation is taking place for industry-wide crowdfunding regulation, which will come into effect in April 2014.
Newer entrants to the market are less established. So, as with any new, unregulated, market there is always the possibility of fraud – although no major examples have yet been exposed – or of platforms failing and folding.
Interest rates tend to be higher on loans taken out using crowdfunding – although the benefits of increased cashflow from access to cash a business might not otherwise secure may outweigh the higher costs.
There are also risks involved for businesses that use alternative platforms, like Borro or Assetz Capital, that require businesses to back up a loan with property or possessions as if anything goes wrong they could lose a home or valuable belonging.
However banks, too, use personal items or property to secure many business loans.
Another concern is when businesses use crowdfunded cash in exchange for equity and may be unnecessarily giving up part ownership of their business in a moment of desperation.
On the plus side, alternative finance means that more businesses with a solid financial background have access to funding. These platforms can be more flexible and creative than banks, which need firms to fulfill a specific criteria in order to be eligible for loans, to help creditworthy firms the access to much-needed finance to grow their business.
For example, Borro offers small business owners and entrepreneurs short-term loans of up to £2,000,000. Loans are secured against assets including handbags, fine art, antiques, prestige cars, luxury watches, diamond jewellery, gold, fine wine and other high value assets.
The maximum loan-to-value is 70% of the estimate of the market value of the customers’ asset and interest rates vary between a flat rate of 2.99% and 6.99% per month. Be aware that while these figures may sound small on a monthly basis, borrow at this rate over the longer term and costs will swiftly add up.
There are no credit checks and loans can be redeemed at any time without penalty.
Don’t forget about possible rule changes
One of the items under discussion in the crowdfunding consultation is the role of the investor – regulators are investigating the possibility of restricting investment access to solely high-net-worth or professional investors – or the amount of cash ordinary investors can put into crowdfunding opportunities.
This is something businesses need to bear in mind.
However, as Graeme Marshall, chief executive of FundingKnight, points out: ‘While there has been some speculation that regulation could restrict the type of investors who use crowdfunding, the FCA has made clear that it considers investing via loan-based platforms such as FundingKnight’s to be generally lower risk than using investment-based platforms, i.e. those that offer equity in return for investment.
‘As such, we don’t expect to see any impact on the kind of investors who use peer to business platforms, or on business’ access to funding.’
Read the full article at This is Money