In this Q&A, David Filmer, head of the mergers and acquisitions team at Harrison Drury, explores the burgeoning alternative finance sector and whether it can be a viable form of finance for your business.
How would you best describe alternative finance and is it becoming more common?
Alternative financing, or AltFi as some are now abbreviating it, is definitely growing in popularity and can be an effective method of funding growth. Alternative finance is a bit an umbrella term as it incorporates different types of lending that are separate from mainstream finance, such as high street banks.
It includes forms of finance such as online crowdfunding, where businesses get finance from many smaller investors, and peer-to-peer lending where those businesses and start-ups seeking funding are matched with investor businesses and wealthy individuals, such as ‘business angels’.
Why is it still seen as ‘alternative’?
While it has become far more common in the years since the financial crisis in the late noughties, many businesses still lack awareness and understanding of alternative finance, seeing it, wrongly, as a riskier source of investment or a lender of last resort.
A 2016 survey by specialist finance provider Together found that the majority of businesses still instinctively go to their bank as a first port of call, with many ceasing their search for funding if they are rejected by those traditional lenders.
That said, the UK online alternative finance sector grew by 84% in 2015, facilitating £3.2bn in investments, loans and donations, according to the Cambridge Centre for Alternative Finance, so it is growing exponentially. Perhaps in the not too distant future it will cease to be ‘alternative’.
What type of businesses and sectors is it most suited to?
In theory, alternative finance can benefit almost any business in any sector if it has the growth potential and meets the lending criteria. However, certain sectors have been shown to be more suited to (or more likely to be supported by) alternative finance, perhaps because of a lack of availability of traditional finance.
For example, peer-to-peer lending in the property sector grew to £609m in 2015 and accounted for 41% of the total volume in P2P business loans, according to the same Cambridge study mentioned above. Technology and manufacturing were the two other sectors that received the strongest backing from the alternative finance industry.
How effective is alternative finance, especially crowdfunding and peer-to-peer lenders?
Equity-based crowdfunding is becoming an increasingly viable funding method, especially for start-ups and new business projects. Sites such as Crowdcube and Kickstarter are popular with the SME market, especially if there are innovative aspects of a business that are likely to capture the imagination of the public.
In addition, peer-to-peer (P2P) lending matches private investors or businesses with borrower companies. On average, companies using P2P lending tend to be established, profitable companies. The main draw for borrowers is the speed at which they can access funds; P2P lending enables you to get the paperwork through and access cash very quickly.
How do you assess regional funding organisations?
Regional funding organisations are another option for businesses seeking funding, and one advantage to these types of funds is that they often provide support to local sector specialist advisors who can help businesses with their growth.
However, these funding organisations can carry with them certain limitations. For one, the process of accessing such funding can be a relatively drawn-out process, with applicants needing to demonstrate a clear vision for growth or innovation articulated in their business plan, and certain funds can have very specific entry criteria. Where matched funding is required, this can also be prohibitive for some smaller businesses.
Do you expect demand for alternative funding sources to increase in light of the uncertainty around Brexit?
A number of leading industry experts have predicted that alternative funding options will continue to grow in light of uncertainty following the result of the EU referendum. In times of financial uncertainty, banks tend to decrease their lending to small businesses.
The opposite is the case with alternative finance lenders. Such lenders can identify gaps and move fast to provide short-term secured finance. However, until we start to see the outcome of triggering article 50, for now I would not expect much change in the short term to the current position.
David Filmer heads up a team of corporate solicitors in Preston, advising on a wide range of legal matters including fundraising, refinancing, business acquisitions and sales, joint ventures and company reorganisations.
For more information on alternative finance and other forms of business funding, email David or call him on 01772 258321.