Why established businesses are using Alternative Finance for funding.

by | May 16, 2017 | Advisor Tips, Investment Tips, Small Business Tips & Advice

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We explore why the altFin sector has increasingly become a major funding option for established businesses as well as startups and seed SMEs.

Secured vs unsecured loans pros & cons

Back in 2005 alternative finance such as crowdfunding was the domain of startups and seed businesses only. Rising from the ashes of the financial crisis crowdfunding grew, as many businesses previously turned down by banks saw alternative finance as a last resort.

A lot has changed since then as SMEs have become a vital component of our economy’s growth and recovery. Alternative funding platforms now provide an increasing number of corporates the capital and liquidity they previously relied solely on the banking sector for.

SMEs are now the backbone to our economy in the UK and according to Close Brothers 2016 report “Banking on Growth: Closing the SME Funding Gap” they account for 99% of all private sector businesses, employing over 60% of all private sector workers.

Last year’s Deutsche Börse Group report on the future of fintech said that: “Lenders and borrowers are able to connect directly through online platforms bypassing all types of intermediaries.” They reported that alternative finance platforms “attracted considerable venture investment, garnering over 40% of VC capital in 2015.” This they say is “fuelled by the multi-trillion size of the addressable markets, the acceptance by millennials of the P2P model, and some of the largest bank/fintech partnerships.”

The government’s launch of the Bank Referral Scheme back in November 2016 is further endorsement of alternative funding for established businesses as well as seed/startup companies.  Under the scheme, the nine largest retail banks are legally bound to refer SMEs turned down for a loan to Government designated websites. These websites then pass on the businesses’ requests to debt financing and P2P platforms.

According to a study conducted by NESTA, Cambridge University and KPMG, the alternative finance sector saw 84% growth 2015 on the previous year. That equates to £3.2 billion worth of loans, investments and donations generated, and this figure is set to rise in 2016/17.

Both P2P funding and debt financing in particular are ideally placed to support established SMEs. They allow private and institutional investors to invest in small and medium businesses, aiding the growth of the economy. SMEs benefit from private investor involvement, enabling them to tap into the investor community for subsequent raises, at the same time as benefitting from lager contributions made by institutional investors.

High Net Worth, sophisticated, and institutional investors are all increasingly seeing this asset class as a valuable part of a diverse portfolio. Debt financing has become more attractive, offering higher possible returns, and a relatively low risk profile compared to investing in more volatile startups and seed businesses for equity.

At CODE Investing, we focus on larger debt financed raises, giving entrepreneurs and investors on our platform a distinct advantage over those using traditional crowdfunding platforms. This is because our marketplace helps established SMEs raise larger figures from a diverse community of both private and institutional investors. By taking loans to finance their growth, companies may appeal to a wider group of investors. Conversely, CODE investors can benefit from the possibility of a high return on investment from an asset class that may well be less risky than buying shares in a startup.

It’s clear to see that alternative finance, be it crowdfunding, debt financing or P2P lending, is no longer the exclusive domain of startups or companies that have exhausted all other means of credit. It is a legitimate and flourishing means for established strong businesses to source growth capital.

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