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The Link Between Firm Growth and Alternative Finance

By January 29, 2015 No Comments
The Link Between Firm Growth and Alternative Finance

UK Money Notes and CoinsThe companies we deal with here at Boost Capital aren’t just looking for money. Typically, they’re pursuing a specific goal – business growth. So, it came as no surprise to me to read recently that SMEs using alternative business finance see their profits increase, and turnover grow after securing funding. They even tend to hire more people.

It’s a reflection of the ambition, drive, and innovative nature of many of the enterprises embracing these new forms of business capital – short-term business loans like ours, peer-to-peer lending, crowdfunding, and commercial arrangements, such as asset finance, or invoice trading. But, in truth, little is known about what makes these forward-thinking firms tick, even by those of us who work so closely with them. Since our industry is young, trends have been tricky to identify at this relatively early stage of the game. Late last year, the innovation charity Nesta joined with the University of Cambridge to find out more about businesses engaging with the alternative finance industry in the UK. And it was their report that revealed the correlation between a preparedness to use non-traditional types of funding, and a greater tendency towards growth. It also unveiled some other, occasionally surprising findings.

The Nesta study showed:

  • The size of the UK alternative finance market has grown from £267 million in 2012 to £1.74 billion in 2014, and could reach £4.4 billion this year.
  • About 86 per cent of business owners who have used alternative finance say they’re likely to approach alternative funders first in future, even if the bank were to offer them similar terms.
  • About three out of four people raising money through alternative platforms are men.
  • Almost three-quarters of users of alternative finance are older – 45 years of age or older, with almost a quarter over 65. However, crowdfunding and peer-to-peer investment platforms tend to attract a younger profile.
  • Common reasons given for using alternative finance include having more control, the speed of access to funds, the ease of use, better customer service, or quite simply a need for fast working capital.

But it was the revelations about the accelerated growth of companies fuelled by alternative finance that really caught my eye. Three-quarters of those raising capital through crowdfunding launched a new product or service as a result. Seven out of ten SMEs borrowing via peer-to-peer business lending saw their turnover grow, and almost two-thirds reported an increase in profit. We see it with our customers, too. Given that so many of the firms we work with come back for a second or third tranche of borrowing, we get to see how they’ve used their previous loans. A large proportion wants the money to expand their business, many others use funds for renovation, while just under one in ten wants to invest in new equipment. All of these are positive moves towards making companies bigger, better, and more efficient.

In many respects, the recent academic findings are a validation of the work we’re doing in our industry. They demonstrate that people are hungry for a new way of financing their enterprises other than following the traditional route of applying for a loan from the bank manager. Tellingly, a large proportion of the successful entrepreneurs interviewed by Nesta reported they had opted for alternative finance after being rejected for funding previously by their banks. This leads many firms to think differently, to really consider why they need extra finance, to research where they might find the right type of offering, and then to use the money wisely – and productively – when they finally get their hands on it.

But the research also shows just how low recognition is of alternative platforms at present. Less than one in ten SMEs has approached an alternative provider for capital. Of those that have heard of alternative finance, but have yet to use it, almost two-thirds said they thought it was too risky. One particular point struck me. There was a commonly expressed fear that alternative platforms or lenders may not be around in ten years’ time. Others felt that new entrants to the business lending field were likely to be less trustworthy in terms of keeping customers’ money and information safe. Such concerns are understandable, I believe, when an industry is still in its infancy. There is a mistrust of the unknown, or the unfamiliar. People have yet to adjust to our presence, to get to know us, or to really understand our way of working. But, trust will come as we develop, grow, and show that we’re here for the long-term. Alternative finance is increasing in influence, and reach at such an extraordinary rate – you might say we’ve gone from being a newborn to a boisterous toddler in a very short period of time. It’s no wonder some don’t know what to make of us yet.

The fact that ignorance about our industry exists can be seen as a great opportunity. Perverse though it sounds, if we can breach that gap in understanding, educate the public, and reassure them that what we do is not moonshine, but increasingly mainstream, then business finance will be transformed forever. We need to single out the groups who are yet to engage with us – women running businesses, and younger entrepreneurs, for example – and explain to them why our type of funding could be beneficial, and relevant to them. Ours is a good news story to tell. We want to lend to businesses that want to borrow – and to grow. The research suggests that if we can get that word out to the business community, then ambitious business owners will see the merit in what we do, and will want to grow with us. And what could be more desirable than that?

Speak to a member of our business loans team on 0800 138 9080

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