The Funding for Lending Scheme (FLS), which the Bank of England and HM Treasury (the UK’s economic and finance ministry) launched in July 2012 to motivate banks to boost their lending, has done little to help small businesses improve their cash flow, recent statistics show. So some small and midsize enterprises are looking to alternatives, such as crowdfunding, so they can keep operating.
Net lending under the FLS program fell to minus-£3.9 billion (US$6.3 billion)during this year’s second quarter when compared with when the initiative first started. Net lending to SMEs was minus-£435 million, compared with being down £719 million in the first quarter, according to the bank’s latest quarterly data show.
With the traditional model of bank lending apparently not working, small businesses increasingly are turning to the UK’s fast-growing alternative finance industry. Indeed, new research by Bibby Financial Services found that many of Scotland’s SMEs in particular are failing to shop around for their financing, even though more than half (54%) are planning to invest in their business over the coming months.
Why not search for best deals?
"Our research begs the question of why Scottish SMEs are not proactively seeking alternative forms of finance and shopping around for the best deals, particularly when so many are planning to invest in equipment and recruitment over the coming months,” Alan Anderson, Bibby Financial head of sales at services for Scotland, said in a statement within the company’s research-findings announcement. “The danger is that SMEs could actually be inhibiting their growth prospects and stifling jobs creation in the future by failing to investigate external finance now."
The traditional banking model is no longer able to meet the complex and varied funding requirements of growing SMEs, Anderson noted. However, it’s vital that owners shop around and ensure they have the information they need to make the most suitable funding decision for their business and that they can take advantage of the benefits of alternative, non-bank finance, he said.
A recent Guardian article notes that more SMEs are turning to crowdfunding initiatives, such as Funding Tree, to build their cash flow. This is particularly true as companies become more established. Before that occurs, most firms will raise funds through sale of equity to individual investors willing to take a risk or that believe in entities within the particular company’s sector.
Once a company becomes more established, Amanda Hill, Funding Tree head of social media strategy, said in the article, “you don’t need to give away a stake in your company. You can borrow the money from a ‘crowd’ of investors instead. This is particularly suitable if you want to expand and need a quick hit of capital to achieve your aims."
Companies wanting funds through Funding Tree must demonstrate they can cover the loan cost with profit-and-loss accounts and by passing a credit check, Hill noted. “You’ll then need to pay back the loan at an agreed rate,” she said.
Unlike borrowing from a bank, getting a loan through a crowdfunding platform means a company is borrowing from many investors simultaneously, so companies may be able to choose investors who offer the lowest interest rates, the Guardian article noted.
Crowdfunding through investment
Unlike other equity crowdfunding platforms, SyndicateRoom enables people to co-invest with angel investors and professional venture capitalists from around the UK, the company’s CEO Goncalo de Vasconcelos noted in the Selling shares in a business may provide a cash injection and allow a company to share risk with investors. And, unlike a loan, it comes without the burden of monthly repayments, he said
However, it’s a long-term partnership with strings attached, a bit like a marriage, so it’s important to weigh up every proposal carefully as different investors add different value to a business, de Vasconcelos noted. “Beware racing down the aisle with the first offer that comes along,” he advised in the Guardian report. ”Securing investment at the right time from the right people can make the difference between strong growth and stagnation for your business, and you shouldn’t be afraid to part with some equity to do it."
Not every company, however, needs to sell equity through such crowdfunding mechanisms to secure improved cash flow. Some companies, such as the UK’s USP Packing, instead are turning to factoring, where they sell a percentage of their future invoices in exchange for quick cash.