The rise of non-bank lending to SMEs
No business can survive without enough cash to meet its immediate needs, regardless of whether the company has healthy order books and profit margins. Management must have an understanding of the amount of cash flow required to operate their business and this must be an ongoing understanding from the management. If they are looking for investment, understanding cash flow is vital to ensuring they are approved for the finance they require.
When the banks went into decline during the recession, their lending to SMEs diminished which gave way to the non-bank finance industry to rise up and offer competitive loans to these businesses.
A recent survey of 1,000 SMEs by Liberis, Business Friendly Finance show figures to support the increase in demand in alternative finance. The Business Monitor research showed that 30% of small businesses interviewed applied to an alternative funding provider for their finance. Comparison figures show only 18% applied for a bank overdraft and 31% applied for a bank loan. These figures support the claim that more and more SMEs are now turning to these platforms in order to gain the funding they need to continue to trade and grow their businesses.
Equity finance can be used in any stage of a business’s growth. The lender is committed to the business and its growth and the investors tend to take a risk with their investment if they see a good opportunity. Not only do these lenders invest finance but they can also bring valuable resources to a business such as skills, experience and useful industry contacts to help with the development of the business. The investor will require some equity from the business in return for their investment.
Debt finance tends to be used as a short-term capital solution and tends not to be used to fund long term investment opportunities unless it comes in the form of a loan or leasing agreement. The lenders will not require any equity or shares within the business but will expect the amount borrowed to be paid back in full plus interest at a later date that was agreed upon during the initial stages of discussion regarding the finance.
Equity Finance – Business Angels
There are also platforms available that will provide both financial and non-financial investment in terms of knowledge and skills in order to help grow the business that is looking for investment. This form of investment is particularly useful within the early stages of a business’s growth. These investors are known as Business Angels. Angels mainly focus their investment within their local area and so will be able to supply local knowledge and local connections to the business. The UK Business Angels Association estimates there to be around 18,000 Business Angels across the UK investing on average around £850million each year to businesses.
Debt Finance – Peer-to-Peer Lending
One of the larger and fastest growing platforms for non-bank finance is Peer-to-Peer Lending. In 2014 lending from this platform reached £1.2bn and during the first quarter of 2015 it had already lent out more than £459 million. (Figures from P2PFA)
Peer-to-Peer lending work as follows; you as a borrower looking for funding will go onto one of the P-2-P lender websites. You will type in the amount of money you want to borrow over a specific period of time and you will be presented with a number of quotes from the website’s lenders. You then will choose the one you want to proceed with; the lender may request some additional information, and then within a short time frame the decision to loan the money will be made and transferred to your bank account. It really is that simple.
A milestone was reached earlier this year for the Peer-to-Peer lending sector with certain banks such as Santander and RBS committing to referring businesses that were rejected for a bank loan to Peer-to-Peer finance providers. An example of this new relationship would be Santander and Funding Circle who were one of the first to begin this referral process.
What Finance is right for you?
Depending on your situation will depend on what finance platform is right for you.
If you have tried the banks and they are not willing to invest it is definitely worth investing some time and researching the different non-bank finance platforms that are available, as there will be one suitable for you.
Please see below some useful links that will help you with your research: