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The term ‘alternative finance’ implies that obtaining funding from sources other than high street lenders is far from mainstream. This used to be the case but gone are the days where finance-seeking SMEs’ first port of call is the bank manager.

Access to alternative finance has given businesses the opportunity to access a more flexible and personal range of funding options that align with their business’ needs and goals, and as a result, the sector is booming.

Alternative finance market growth

The alternative finance market has achieved stellar growth in the last five years, and there is a great deal of room for this growth to continue. The Cambridge Centre for Alternative Finance (CCAF) published its 4th annual European Alternative Finance reportearlier this year, in which they reported on the rise of alternative finance across Europe, concluding that the market grew by 36% in 2017 to €10.44  billion.

The UK makes up the vast majority of this European market – 73% (€7 billion). It is predicted that this percentage is set to change, however. When you exclude the UK from statistics, where the alternative finance market is already more established, growth across other European nations was reported at a staggering 80% between 2013 and 2017. This growth is not predicted to slow any time soon as more European nations jump on the bandwaggon.

What has caused the boom in the alternative finance market?

A combination of factors has contributed to the steep growth trajectory of this market. Some are unique to the UK, and others a reflection of shifting priorities and ideals in the global business marketplace.

Decreased access to lending from banks

SMEs have long complained they are at the back of the queue when it comes to banks dishing out credit, and this situation has only been compounded by increased caution from banks due to Brexit uncertainty.

Startups, in particular, struggle to achieve access to cashflow lending that is essential for growth, because they do not have the credit history or the assets to secure lending from traditional sources.

Even when SMEs are deemed creditworthy by a bank, the decision-making process can take months. Arrangements are constrained by bank opening hours and the availability of the bank manager, too. These finance solutions are not nearly convenient or instant enough to suit the needs of modern businesses – banking isn’t evolving to keep up.

Seeking more flexible funding

There is a common misconception that businesses turn to alternative finance only when they have been turned down for traditional credit, or predict they will be. Increasingly we are finding that this is not the case. Alternative finance options like invoice finance are not the poor relation of high street lenders, and not somewhere that beleaguered SMEs turn when they have run out of options. There are far more positive reasons for thinking outside the box when it comes to accessing funding.

Increasingly, businesses are opting for tailored, flexible funding arrangements that can provide benefits that outweigh standard bank loans or extended overdraft facilities. Early-stage businesses in particular, who want to achieve rapid growth, need constant access to cash but cannot afford to take on fixed repayment debt, that they may find themselves in a position of being unable to repay.

Invoice finance provides the unique solution of only borrowing against the asset you already have (businesses that owe you money), reducing risk and avoiding inappropriate funding, whilst achieving instant access to capital and efficiently managing your ledger to stimulate constant cash flow to boot.

Increased awareness

In a survey by Ashby-based alternative finance company ThinCats, it was found that 89% of UK financial advisors would recommend alternative finance over bank loans, and that 86% considered it the ideal solution for SMEs looking to refinance or restructure.

Specific to invoice finance, more than half of surveyed SMEs were aware of these products and services.

With such a strong awareness of alternative finance products, it isn’t any wonder that the UK really are trailblazers in this market globally – especially given the Government support of the growing sector.

In 2016, the UK Government launched the Bank Referral Scheme. Through this scheme, businesses who have applied to participating banks for credit and been turned down are referred to alternative finance portals. These online portals ask questions about the business’ needs and circumstances and whittle down the options and appropriate finance opportunities and put the business in touch with providers who may be able to offer appropriate funding.

Though the scheme hasn’t been as successful as was hoped it has helped the evolution and revolution in the perception of access to funding for UK SMEs.

Businesses are evolving, so too must their finance options

Small to medium businesses and startups want access to finance that can grow with them. All businesses are individual entities, with needs that are fluid and what works for one doesn’t necessarily work for another. It’s clear that SMEs have now developed a taste for funding solutions that are designed to reflect their individuality and rapidly changing goals and challenges.

SMEs are already seeing that the alternative finance sector is able to offer them products that more than compete with those on offer by traditional lenders, and with continued Government support the rise of alternative finance looks like it will continue for many years to come.

Partnership invoice finance offer invoice discounting and factoring services to UK SMEs who need access to working capital to meet their goals. We would love to talk to you about your business, your circumstances and how we could help you grow. Contact us to talk about how we can work together.