Britain’s alternative-finance sector is booming, offering a much-needed fillip to small and medium-sized enterprises struggling to access finance from conventional sources.
The UK is now the second-largest centre of alternative finance in the world, according to a report by The Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge’s Judge Business School. China tops the table.
British alternative-finance providers offered around £9.2bn of funding to businesses over the course of 2020, almost 15% more than in 2019, despite the impact of the Covid-19 pandemic. Around two-thirds of the total came from debt-based finance, through a range of different types of lending.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The data is a reminder that small companies seeking to borrow have a widening array of options. Traditional bank finance has become more difficult to secure over the past year.
Many lenders have concentrated on supporting the government’s emergency programme of Covid-19 loans and how to unwind this stock of debt. But even where a small business does have the option of obtaining a traditional bank loan or overdraft, alternative-finance products may be a better choice.
Invoice finance, in particular, continues to grow in popularity. Through such arrangements, small businesses can effectively access the value of their invoices upfront rather than having to wait for them to be settled. The money is advanced from the invoice-finance provider, with the loan repaid once the customer settles the bill.
This can be a flexible way to arrange finance, particularly where your business is struggling with irregular cash flow. The size of an invoice-finance facility rises as your company’s revenue grows – because there are more invoices to borrow against – rather than being fixed in size as with a bank loan. Demand for asset finance is also growing, with businesses using these facilities to fund capital spending. Lenders feel comfortable extending credit because they can use the asset being financed – new machinery, say – as collateral to back the loan.
Alternative options
Peer-to-peer finance platforms also continue to raise more money for smaller firms. Investors in these platforms often feel able to take more risk than conventional lenders, with demand and supply on the platform setting the price of the loan secured. The CCAF report also reveals consistent growth in financing options, such as mini-bonds, lending linked to property and debt-based securities.
There is no one right answer for businesses seeking credit. The best arrangement for you will depend on your company’s individual circumstances, including the reason you need to secure credit. The cost of borrowing also varies significantly from one type of credit to another.
Nevertheless, the fact that alternative finance continues to grow is good news for small businesses. There is now more choice than ever of how and where to secure credit.
Remember too that if a mainstream bank decides to reject your application for funding, it is now legally bound to refer you to a platform offering advice and information on what other forms of funding might be a possibility.
These platforms – Alternative Business Funding, Funding Options and Funding Xchange – can also be a good first port of call when you’re assessing potential alternative-finance options.
-
Dividends: Reliability in uncertain timesDividends have formed over half of the total return of the UK market over the last 20 years. Dividend strategies have been under-appreciated while investors have focused on US mega cap technology. Income strategies may have more appeal in a tougher investment climate
-
Trump’s tariffs: what is he thinking and how should UK respond?Every right-thinking person knows that free trade is a surer route to the wealth of nations than protectionism, says Stuart Watkins. What is Trump thinking?
-
Why are energy bills so expensive in the UK?Electricity bills in the UK are higher than in any comparable rich country. Some blame the net-zero zealotry of the government for that. What is really to blame for high energy bills?
-
Will Putin invade Europe? Why investors know Russia is a paper tigerOpinion Markets are right to ignore talk of Putin invading Europe, says Max King.
-
Why French far-right leader Marine Le Pen has been banned from running for officeMarine Le Pen, presidential candidate and leader of France's right-wing National Rally party, has been barred from standing by the country's judges.
-
Five years on: what did Covid cost us?We’re still counting the costs of the global coronavirus pandemic – and governments’ responses. What did we learn?
-
Will Trump force the Fed to lower interest rates?Opinion Markets are ignoring the risk that Donald Trump forces the central bank into reckless interest rate cuts
-
London can lure Brexit-fleeing banks back to UK – but the City must move quicklyOpinion Many banks fled to Paris in the wake of Brexit but are now in full-scale retreat. The City should move quickly to lure them back, says Matthew Lynn
-
Protests erupt in Turkey after the arrest of president Erdogan's rivalTurkey's president has jailed his main political opponent, Ekrem Imamoglu
-
What is the Mar-a-Lago Accord and why is it getting attention from Wall Street?On Wall Street, there is talk that Trump's tariffs aim to make the world’s leaders come crawling to Mar-a-Lago, his Florida residence
