Why SMEs should look to alternative lenders to fund their growth.

Where people had barely heard of the Alternative Finance sector just a few years ago, now everyone is talking about new funders breaking the bank-borrowing mould. Small businesses are catching on to the fact that there’s more choice available.

Traditionally, bank lending was the most common source of external finance for SMEs, but recently, banks have become reluctant to lend to certain sectors, particularly new, innovative and fast-growing enterprises, with a higher risk-return profile. Funding gaps can be a challenge for companies wanting to undertake major transitions, such as management buy-outs (MBOs) or Management Buy-Ins (MBIs).

A report by global innovation foundation NESTA raised concerns that an estimated 100,000 SMEs in the UK were turned down for bank lending with new start and young businesses making up 50% of the lending rejection rate.

Rather than accepting credit constraints as “the norm”, it becomes increasingly important to broaden the range of funding options available, to ensure entrepreneurs can continue their role in contributing investment, growth, innovation and employment.

There are now more than 100 alternative finance providers offering a range of options. These include asset-based lending, peer-to-peer lending, alternative debt, venture capital, and equity or a mix and match package of the above.

The proliferation of choice makes the role of an informed broking professional more vital than ever in ensuring that SMEs have access to the finance they need and are guided towards to the most appropriate solution. The broker community now facilitates more than £1 billion worth of SME borrowing every month.

Here at ABL Business, we dealt with more than 200 companies last year and brokered £30million worth of funds using a hybrid mix of finance types to achieve the goals of each individual client. In one case, for example, a company looking to move quickly to new commercial premises and fund expansion could use bridging finance for the move and an invoice finance facility with an overpayment to support future growth and ease cash flow pressure.

Technology versus the human touch?

Modern technology has made incredible advances in loan processing and it’s partly due to this that the alternative finance market has exploded at the rate it has.

But personal relationships remain vital in the world of business funding. Back when businesses would automatically turn to their bank manager for a loan, that trusted figure would make capital available (or not), based on a long-standing knowledge of the company, its founders, and the local economy.

Nowadays, SMEs with under £1m turnover are unlikely to get access to a bank manager at all and can often find themselves limited to call centre access.

So, the personal touch is now more likely to be fulfilled by an intermediary like a broker who gets to know the ins and outs of their client’s business, their story and their aspirations.