Alternative lending: is this a viable option for my small business in 2015?

Many small businesses are continuing to hit a brick wall when sourcing investment or working capital from the traditional lending market. While problems with the banks frequently hit the headlines, one potential solution – at least so far as small organisations are concerned – receives much less attention. It goes under the umbrella term, ‘alternative lending’.
It includes a whole host of arrangements from businesses and individuals borrowing small amounts of money from large numbers of people; through to socially driven startups reaching out for community funding. You may have heard of crowdfunding for instance, – but how much do you know about peer-to-peer lending platforms? What do these platforms involve and do they represent genuine opportunities for SMEs?
Alternative lending: why is it catching on?
Shrinking order books, weakened collateral and a sudden atmosphere of risk aversion in the financial world: in a nutshell, this was the ‘perfect storm’ faced by small businesses seeking finance in the aftermath of the 2008 banking crash. Fast forward to the present and the natural assumption may be that the situation should be much better. After all, order books are filling up, the commercial property market is buoyant and policymakers frequently talk-up their desire to get banks lending again. Not so, it seems – with figures suggesting lending levels fell last year.
Given the climate, it’s no coincidence that the alternative finance market is expanding rapidly. A report from Nesta and the University of Cambridge suggested that the value of the UK market as at the end of 2014 stood at £1.74 billion. It grew by 161 per cent in the year 2013 to 2014 and 150 per cent the year previously and new online platforms are continuing to spring up.
P2P lending, invoice trading and equity crowdfunding are the three most commonly used methods of alternative lending for UK SMEs – yet awareness is still low. For instance, 76 per cent of SMEs were unfamiliar with the P2P model despite this being enjoyed by a lion’s share of the market.
For those still in the dark, here are the key characteristics of these three main models:
P2P Business Lending
Equity Crowdfunding
Used mostly by early-stage businesses seeking seed or expansion capital and strongly associated with tech startups, this is where a stake in a business is sold to multiple investors in return for capital. The model received headline attention recently when Boris Johnson announced a £25 million injection of public money into a public/private co-investment fund involving the Crowdcube platform.

• Nesta figures suggest the UK equity crowdfunding market grew from £28 million to £84 million between 2013 and 2014. The average deal size is just under £200,000 and it takes, on average, 125 investors to fund an equity deal.
• As well as a means of injecting capital into the business, involvement can also be a useful way of raising the profile of a new brand.
• A professional pitch, a proven track record and a sound business plan are crucial to securing investor interest.
• On top of the purely financial, some investors can provide a degree of mentorship and access to new market opportunities. The flipside is a loss of absolute control over the decision making process. This could be through the issuing of shares that carry voting rights and/or board participation rights. The terms of the investor agreement need to be tightly defined and understood thoroughly by all parties from the outset.

Innovation and a very real business need have both contributed to the emergence and growth of these platforms. Whether they are right for you will depend on a number of factors – not least the stage your business is currently at and your attitude towards multi-party involvement in your firm. What they show though is that a refusal from traditional lender in 2015 does not necessarily mean your search for capital is over.