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Why are UK SMEs turning to 'alternative' forms of finance?

The Asset Based Finance Association recently announced a 9% increase in startups and small businesses borrowing money against their own assets. This change is part of a wider trend that has caused the value of the 'alternative finance' industry to explode from £666m in 2013 to £1.74bn in 2014.

What is it?

The term 'alternative finance' generally refers to sources of capital that lie outside major banking institutions. These types of finance include, but are not limited to:

  • Asset-Based Finance: This involves securing loans against the physical assets owned by a company. Some providers also offer Invoice Financing, which involves a third party buying a company's unpaid invoices for a fee.
  • Peer-to-Peer Lending: Although this is a somewhat ambiguous term, P2P lending usually refers to the practise of sourcing loans directly from other SMEs or a collection of individual investors.
  • Venture Capital and Angel Investors: Individual investors sometimes supply capital to SMEs in exchange for a percentage of company ownership. These 'angels' often work with ‘incubators' that offer additional loans, office space and business advice to start-ups.
Why are SMEs choosing 'alternative finance'?

Although there are many reasons for the rise of 'alternative finance' among UK SMEs, there are two key factors that help to explain this phenomenon.

Lots of SMEs found themselves in trouble during the recession. Turbulent financial track records have since made it difficult for small companies to get high street banks' approval for loans.

Alternative lenders, on the other hand, have allowed SMEs to secure loans against their assets, thereby providing a financial lifeline for small British companies.

Interestingly, SMEs are having problems with high street bank loans even though the worst of the recession has passed; the Financial Ombudsman received 741 complaints about bank loans from small businesses last year. In this context, it's easy to see why start-ups are increasingly looking for a helping hand elsewhere.

'Alternative finance' can also be attractive to SMEs because of its flexibility. Unlike some traditional sources of capital, smaller organisations tailor loans to suit the needs of individual businesses. Deloitte's Commercial Refinance Director Shaun Hyland thinks that this personal touch has been a key pull factor for start-ups.

If your business is experiencing cash flow problems due to unpaid loans, don't hesitate to contact Dukes Bailiffs for friendly and sensitive advice.

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