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In previous articles, we have argued that with the coronavirus pandemic changing the nature of the business landscape, so must ways business access capital; namely through embracing equity investment as a way to fund SMEs. But will alternative finance provide a more long term solution to protecting SMEs after the pandemic?
Well, the answer would seem to suggest a resounding ‘yes’. In research from Barclaycard, almost two-thirds of SMEs are planning to invest in their business over the next 12 months. It's perhaps no wonder, then, that the UK’s recovery from Covid-19 will rest predominantly in the hands of many small and medium-sized enterprises, whose products and services will help to create more jobs and thus stimulate the economy.
Despite the pandemic’s major impact on the UK economy, SMEs are still viewed as investable. A government report has shown that investors are continuing to back some of the UK’s high-growth tech companies, despite coronavirus. More than £4.2bn has been invested into young UK-based tech firms since January 2020, according to the Digital Economy Council, with fintech and enterprise software firms accounting for around 60% of the fundraising.
According to the Federation of Small Businesses, there are around 5.8 million SMEs which employ 16.6 million people and account for 99.9% of the business population. It is perhaps no wonder that this vast sector has a significant impact on the UK economy. But even so, funding these businesses has become increasingly difficult.
SMEs face a funding gap of just over $5 trillion, you would have thought in this current pandemic, that there would have been an immediate trend to use alternative sources of finance. However, this couldn’t be further from the truth.
Ever since the 2008 financial crash, when banks were forced to hold more cash in reserves to strengthen their balance sheets, lending to individuals and businesses declined drastically. Over a decade later, the trend shows that many banks are still reluctant to lend to SMEs, even those that display strong growth prospects.
This has strengthened the belief of some SMEs that traditional lending is risk-averse and will be near-on impossible to secure a sizable loan to expand the business in a recession. Hence why the government has created the Bounce Back Loan which has a 100% guarantee for banks, and is much more successful than the 80% guarantee under CBILS.
According to the annual SME Finance Monitor, the success rate for bank-loans in the UK has declined and rests at just 63%.
Had the proliferation of alternative finance not taken place as quickly as it had done then inability of SMEs to access funding would have been far greater. Figures show that the alternative finance market is worth over £8.3bn in the UK. However, figures show that between the start of Q4 in 2016 and the end of Q4 in 2017, a total of £29bn in new loans were awarded to the country’s small businesses, which shows the banks still have the monopoly. But year on year, alternative finance eats into this marketplace.
We have seen just some of its benefits during the pandemic, with P2P lenders being accredited to provide the government’s Coronavirus Business Interruption Loan Scheme (CBILS). Alternative finance lenders are using the latest fintech which enables to lend to those businesses who need finance quickly, which can be faster than traditional legacy systems operated by large institutions
Indeed, with alternative finance having led to the emergence of P2P lending, equity crowdfunding and other funding options, the traditional legacy banking system is no-longer meeting the needs of many adaptive SMEs. Year on year banks have been lending less to small businesses. However, during this epidemic when the government guaranteed their loans and removed the risk, we saw an immediate increase in their lending. Yet, in a healthy economy their appetite for risk declines.
For businesses with little to no tangible assets, banks are far more reluctant to lend, which is why traditional lending no longer fits with how a business works in reality. In this day and age, banks do not have the mechanism to value Intellectual Property and good will. Their systems are set up for bricks & mortgage as well as other tangible assets.
In the round, alternative finance can offer SMEs a far more adaptive and flexible way of accessing the funds they require. And with initiatives such as the Seed and Enterprise Investment Scheme providing incentives for investors to invest their private capital into small businesses, the modern entrepreneur needs to educate themselves on equity and alternative capital resources, rather than traditional bank lending.
Authors: Sacha Bright & Oliver Murphy
Disclaimer
To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed. Nextfin is not liable for any damages arising from the use of or inability to use this site or any material contained in it, or from any action taken as a result of using the site.
Tagged: sme alternative finance equity crowdfunding p2p lending coronavirus
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Mujeeb UrRehman
4 years
i have read this article and found it very informative. I have hired a professional accountants and they dealing with my business accounts and helping me alot.