IT is a truth universally acknowledged – in this economic climate, at least – that as banks remain reluctant to lend, alternative sources of funding become more attractive. In fact it’s become a cliché even to say so.
But this is a lesser known fact: while the number of rich Mr Darcys who want to invest is set to go through the roof, the growth in platforms enabling this is steadying out. More investors are becoming increasingly loyal to their favourite platforms and increasingly discerning as to their requirements. No one wants to end up loaning money to Mr Wickham. Thus new and growing companies, that are considering raising money in this way, need to be aware of the increase in funds available coupled with the consolidation of platforms.
A few facts first… In the first quarter of 2014, the cumulative funding delivered to SMEs has risen to about £667,75 million: there has been an 84% increase in less than six months. The research organisation Knowledge Peers has estimated that 2014 will deliver a total of £850 million to SMEs. In 2013 52% of investors became active. Not only is this set to carry on increasing at a faster rate, but many existing investors said they were keen to put more of their portfolio into alternative models. There will be a lot more money to go around.
There are 42 currently active platforms in the alternative funding space that are relevant to SMEs in the United Kingdom. This makes up a just under 25% of UK-based crowd or P2P platforms (an estimated 175 platforms exist in the UK, including donation, reward and personal loan platforms). Debt platforms continue to have the largest share with 59% of the market compared to invoice platforms at 32% and equity at 9%.
So, just as investors become more discerning, SMEs looking to raise money have to be more careful about which platforms are suitable for their business and their funding model. The alternative finance scene is still unexplored territory for many and has yet to be mapped. Many SMEs remain wary and feel ill informed. According to Knowledge Peers research, many feel improperly advised by bank managers as to where to apply when seeking another form of finance. But, why, I ask you, would someone advise on matters which are essentially benefitting competitors?
If SMEs are going to fulfill their funding potential, they are going to have to do their homework and be aware of the things which matter to investors - whether the platform has a ‘nominee structure’ so those with equity can negotiate collectively, whether the platform is responsible for corporate governance or whether the platform wants money up front or only takes its return when investors succeed.
We’d suggest starting with Knowledge Peers and their Alternative Funding Network which has lots of valuable advice online and informative events offline. Louise Beaumont, co-founder of Platform Black, which deals with invoice financing, and one of Knowledge Peers’ thought leaders, had some advice. According to her, one of the best places to start is the Alternative Business Funding:
‘The big success of the past year to me has been to see the alternative finance movement get together and start to act like a movement. I’m particularly thinking about the creation of the Alternative Business Funding portal www.alternativebusinessfunding.co.uk as a way for businesses that want to know what their options are beyond the traditional sources of finance to get some straightforward information on their options. It’s a very straightforward website that was founded by the seven biggest players in alternative finance – and we aim to open it up to many others over the coming months.’ This isn’t quite as shameless a sales pitch as you might think as an independent third party now administers it. The options are however still limited to the platforms participating. The Department for Business (BIS) is also a good start, Tania Zielger at Knowledge Peers advises. It has some good filters including this one.
So it's time to fill in the extremely simple questionnaire, consider the 42 options and find out which Darcy might be the right match for you.
What sources have you found particularly useful when it came to researching alternative funding options? Tweet them to us @WorkspaceGroup.