The growth of alternative and complementary finance for SMEs

The growth of alternative and complementary finance for SMEs

It is no longer news that many businesses and individuals continue to feel the force of the economic recession. For SMEs though, things are looking up. Chancellor George Osborne said in September this year that the UK economy is showing “signs of a balanced, broad based and sustainable recovery”. The latest GDP figures confirm the UK’s economy grew by 0.7% in the second quarter of this year, and a revised economic forecast by the British Chamber of Commerce increased growth from 0.9%, to 1.3% for 2013, and from 1.9% to 2.2% for 2014. The outlook is promising.

Despite tough times, SMEs have continued to plan for growth – building resilient financial infrastructures and looking to alternative and complementary funding sources to improve cashflow and maintain essential business investment. Many have turned to alternative lending solutions in lieu of traditional finance as the banks have tightened restrictions and cut back on credit approvals.

To shine some light on how big the financing issue has become for SMEs, and how many businesses have been affected, The Department for Business Innovation and Skills published a report in April 2013 stating 7% of SMEs applied for bank loans, and 14% for bank overdraft facilities between Q3 2011 and Q2 2012. Of these applications, 23% (approximately 77,000 businesses) were rejected for bank loans and 19% (approximately 127,000 businesses) for overdrafts. With such a large number finding it difficult to obtain traditional finance, many have looked to alternative finance solutions to complement mainstream lending.

Flexibility in asset finance
High up on the list of popular commercial finance solutions is asset-based finance (ABF). ABF is finance secured against a fixed asset (for example vehicles, office equipment and plant and machinery) or a floating asset (for example, debtors) in the balance sheet. According to the Asset Based Finance Association (ABFA), 1 in 3 companies in the UK use this form of funding in one form or another.

Within this, invoice finance – either factoring or invoicing discounting – is predicted to rise 7% from 42,500 (in 2012) to over 45,000 by the end of 2013.

Both factoring and invoice discounting are appealing forms of cashflow finance for SMEs, especially where a strong debtor book exists. For many businesses though, the agreements can be expensive and restrictive, and require businesses to commit to finance the entire sales ledger. The length of agreement is generally spread over a long term too.

Evolution of complementary finance
Recently, a new form of invoice financing has emerged to offer more flexibility and shorter agreement periods, putting smiles on the faces of businesses that may have been averse to more traditional forms of invoice financing.

Spot factoring, while attractive in its delivery is expensive. Rates are typically 7%-9% of the amount financed.

This next generation of invoice finance is based on the principles of crowd-funding, and does away with the barrier of cost.

Invoice trading allows businesses to raise finance against individual invoices, using a real-time online trading platform where registered investors bid to fund invoices. The response is fast; invoices can be funded in minutes. Invoice trading can be a more attractive option if a business does not want to be locked into a long term agreement where all invoices are committed. Invoice trading has flexible pay as you go terms and allows businesses to fund 30, 60 and 90 day credit terms.

Financial resilience through an alternative outlook
TheCityUK recently reported that 80% of financing in the UK and Europe is still provided by traditional bank funding routes and suggested that the growth in alternative finance could help to increase resilience in the wider financial system. Many businesses, accountants and business advisors are recognising this opportunity and tapping into an increasingly diverse pool of finance sources to spur on growth and financial stability for themselves and their clients.

As Sir James Dyson said, “You are just as likely to solve a problem by being unconventional and determined as by being brilliant.” As the founder of a company now worth £1.2bn, and someone who was rejected by most banks for start-up loans his early days, perhaps his words of wisdom can offer direction and a new way of thinking for SMEs. Our financial landscape is evolving and signs indicate that complementary and alternative sources of finance offer a clear path to stability and success.


About the author: Beth Nicholas is an approved writer for Platform Black – provider of complementary and alternative finance solutions including invoice trading, supply chain finance and channel finance.


The Growth of Alternative and Complementary Finance – An infographic by the team at Platform Black – Invoice Trading
Sponsored guest post provided by Platform Black

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