Alternative Finance Is Crowding Out The Banks

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Two-thirds of small businesses are open to sourcing working capital from alternative finance sources, according to a new survey.

Half of all entrepreneurs also believe alternative finance has opened up new opportunities for starting a business.

The poll by the UK Bond Network also looked at businesses turning over around £1.1 million a year and revealed that 94% of entrepreneurs would investigate alternative finance as a way to raise money.

Alternative finance covers a range of options outside the traditional debt funding route from a bank.

Finance sources

Several alternative funding methods growing in popularity include:

Booking.com
  • Crowdfunding – where a group of investors pool small amounts of cash to finance a business or project for a reward or equity stake
  • Peer-to-Peer Lending (P2P) – a similar concept to crowdfunding, but the entrepreneur prepays the loan with interest rather than offering a reward or equity stake
  • Corporate bonds – larger, more established companies borrow from investors, typically at a fixed rate over a three or five year term 

Alternative finance involving taking an equity stake in a company can also be wrapped in a tax incentivised Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) wrapper.

However, despite the recent spurt in interest in alternative finance for businesses, 85% of entrepreneurs surveyed with companies with a £1 million plus turnover disclosed they were aware of the options – compared to 58% of those with lower turnovers.

Mainstream movement

UK Bond Network CEO Chris Maule explained alternative finance sources are important for small businesses and entrepreneurs need to know how to tap into them.

“The banks are slow and cumbersome when deciding whether to fund a business,” he said. “Alternative investors and funders are quick to make decisions. Alternative finance generally comes much cheaper than a bank loan as well.”

Maule sees alternative funding losing the label and becoming more mainstream in the future.

“Online platforms offering crowdfunding and p2p lending offer a lot to small businesses who need relatively small sums of money quickly and easily,” said Maule.

“This fast-moving culture is changing the business funding landscape and moving the focus away from banks and finance houses to other forms of borrowing that are simple and straightforward to access and attain.”