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Small businesses in the UK turn towards alternative funding options

Small businesses in the UK are searching for alternative funding options to maintain their cashflow post-Brexit, according to research by SME (small and medium-sized enterprises) financing platform Swoop.

CEO Andrea Reynolds says: “We are getting an increasing number of enquiries about contingency arrangements ahead of the 29 March deadline.”

Why are SMEs considering alternative funding options?

Concerns are being raised by some that traditional banks will hold fire on lending to small businesses. Andrea Reynolds says: “This concern is particularly affecting older businesses who have been through a crash before and found their finances were withdrawn very quickly. They are wondering whether they can trust the banks.”

A report produced by the British Business Bank supports the theory that there is much greater awareness of alternative providers among UK small businesses. The annual Small Business Finance Markets report 2018 shows that just over half of small businesses in the UK are fully aware of peer-to-peer lending as an alternative to traditional funding. This rose from 47% in 2017.

More than two-thirds of small businesses are aware of equity crowdfunding, up 10% from 2017. Just under 70% are aware of venture capital funding as an option, a rise of 7% from 2017.

What are the alternative funding options?

Here is a summary of the main streams of alternative financing available to small businesses:

  • Peer-to-peer financing (P2P)

This channel is a way for people to lend money to businesses or other individuals. The lender gets interest when the loan is repaid. P2P platforms are like marketplaces, bringing together businesses and individuals that want to lend money and matching them to those who need funding.

It allows small businesses to get funding without going through a bank. Some websites divide money loaned between many borrowers, others allow the lender to choose who to lend the cash to.

The higher the interest rate offered by the person or business looking for funding, generally speaking the riskier the investment is. It’s a simple process to open an account with a P2P lender and pay money in via direct transfer or using a debit card. The lender can then set the interest rate or agree one with the recipient and choose a fixed period of time for the loan. Some sites charge a fee to lend money.

  • Equity crowdfunding

This is where people invest in unlisted early-stage small businesses in exchange for shares in that business. A shareholder, therefore, will profit along with the company is it does well, and vice versa. If the company fails, it is possible for investors to lose some, if not all, of their investment.

Traditionally, only venture capitalists, wealthy people and investment angels could invest in start-ups. The shift towards crowdfunding equity in businesses opens the door to a much larger number of possible investors.

  • Venture capital funding

This is a form of financing that investors provide to small businesses and start-ups with long-term potential for growth. Generally, venture capital funding comes from wealthy individuals, financial instututuons and investment banks. However, it doesn’t always come solely in monetary form. It can be in the form of managerial expertise.

VC funding is increasingly popular with new smaller businesses, particularly if they’re struggling to gain access to bank loans or other forms of lending.

James Turner, Managing Director of Turner Little Limited says: “While Brexit certainly plays a part in small businesses seeking out alternative financing away from traditional banks, this is also part of changes in the business world as a whole.

“Crowdfunding, secure platforms, cryptocurrency, FinTech and the ramping up of innovative, workable ideas is transforming the business world year after year. Small businesses are finding there are new ways to access funds from disruptive start-ups and small businesses offering a way to maintain cashflow away from the usual channels. Banks must find ways to compete in this new market and acknowledge that small businesses in the UK are demanding more flexibility and personal service from lending streams.”

About Turner Little
Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.

Turner Little and its affiliates do not provide tax, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.