When a name as big as Lord Young says something, you’d be wise to sit up and listen: so were his comments on alternative finance and small business accurate?
At the 2015 AltFi European Summit, Lord Young described alternative finance as heralding a golden age for small and medium sized businesses, freeing them from the stranglehold big banks and financial intuitions have had over SME finance.
This comes as the European alt fi market surges by 144% to €3 billion, dominated by UK platforms who made up 80% of the entire market, and Britain stakes a claim to be the most entrepreneurial country in Europe.
At first glance, this gives British businesses, from start-ups to established multi-million companies, a flexible alternative to seeking bank loans. Solutions in the alternative finance sphere range from reward-based crowdfunding campaigns that might raise a few thousand pounds, through to equity release funding for five and six figure projects and peer-to-business loans to raise millions.
It can help start-ups, who’ve often found it very difficult to satisfy the bank’s criteria for lending; more established companies who want to free up cash flow; and ambitious small and medium sized companies seeking funds for growth.
While this is providing opportunity for thousands of businesses, is it alone enough to nurture a golden age for British businesses of all sizes?
A lifeline for start-ups?
2014 saw the highest number of new businesses ever registered with Companies House, along with a fall in failing companies. For new entrepreneurs, alternative finance platforms offer ways to raise the sometimes small sums of vital capital necessary to get off the ground.
Although banks do offer loans to start-ups, they might not always have the credit history to get approved, or they simply might not be the most suitable form of finance. Even a Lloyds executive says small companies are still too reliant on bank-based funding.
Crowdfunding and some peer-to-business platforms offer the opportunity to raise small sums of seed capital, often faster than would be possible through traditional financial institutions. Both forms of alternative finance give entrepreneurs the chance to access equity as well as debt-based funding.
These funding platforms can be invaluable for early stage businesses to test their concept too, as frequently campaigns offer some form of reward to their investors. This might be product samples, special discounts or experience days, which build excitement around the brand and provide an opportunity to get user feedback.
However, some point out that that typically alternative finance platforms don’t put new enterprises in touch with the mentoring and business advice that sometimes comes with other forms of funding. This criticism doesn’t take into account that there’s nothing stopping ambitious business owners from finding business mentors through other channels though.
Helping growing businesses through the valley of death
Fast-growing businesses need different support and funding opportunities to start-ups. A recent survey by UK Bond Network found that expansion would be the main reason why nearly half of SMEs would seek funding.
Some mid-sized, more established businesses are frustrated by the lack of support available during this stage. The CBI even went as far as to describe mid-sized businesses as a “forgotten army”, while other commentators say that the SME label needs to be broken down as medium sized companies have such different needs to smaller firms.
The big banks control 85% of all loans to SMEs and cautious attitudes to risk are still manifesting reluctance to lend, even to companies with proven track records. Alternative finance can provide a route through this valley of death, as businesses are stretched by the costs of increased operations, as well as potentially dealing with common cash flow problems such as late invoices.
This can commonly be through either equity or debt crowdfunding or peer-to-business bonds that typically offer investors more attractive returns than those on savings and investment accounts. For businesses, it can allow a balance of equity and debt obligations to be achieved. If a proposed investment is oversubscribed, companies can take their pick of competitive interest rates from eager investors.
Another bonus, as demonstrated by some very successful campaigns that become newsworthy in their own right, can be increased brand awareness and press coverage – something rarely achieved with a traditional bank loan.
But what about other problems?
Funding isn’t the only issue facing British businesses. Other major hurdles at the moment include the skills gap, regulation and taxation. According to Lord Young, business taxation is now lower than it was when he started out in the 70s but the skills gap and regulations are pressing concerns that could easily tarnish another golden age of British business.
58% of British businesses don’t think that they will have enough skilled staff to meet their future needs, according to a survey by the CBI employer’s organisation. Concerns aren’t just about hard skills, but include time management and attitude to work. Fields such as tech, digital and engineering are experiencing particularly acute shortages already.
Meanwhile the regulatory burden falls particularly heavily on SMEs – complying with regulations can cost up to ten times more for smaller businesses. Although the European Commission has proposed simplified rules and exemptions for SMEs, in reality business owners and directors are still struggling with complex and sometimes overwhelming regulatory needs.
Alternative finance could well open up a golden age for entrepreneurship and British business, but it needs to be part of an overall landscape that encourages the growth of small and mid-sized companies.