An established, well run and profitable SME with a clear strategy should be able to obtain funding, however it is widely reported that SME’s are struggling to access the funding they require to finance growth. This may be compounded by the recent General Election and resulting economic and political uncertainty.
At £1.8 trillion, SME’s in the UK contribute almost half of the private sector turnover and provide 60% of employment. Reflecting the importance these organisations have on prosperity, alternative financing sources, including established forms such as lease finance, invoice discounting and new forms such as crowdfunding are gaining popularity. This is because they offer borrowers greater choice and flexibility regarding the source and structure of funding, which traditional borrowing struggles to match.
As interest rates on traditional savings products have plummeted, we have witnessed the rise in prominence of crowdfunding, both as a viable source of finance for businesses and a source of enticing returns for investors. This has led the market to grow to approximately £3.2 billion during 2016.
Crowdfunding, which usually takes place on a website platform, is a broad term which encompasses a number of forms, primarily:
This allows investors to buy equity in a business, from as little as £10, with returns realised through dividends or upon eventual sale of the business. Businesses looking for funding apply to online platforms such as Seedrs, who list the opportunity and administer the process of issuing share certificates, handling voting rights etc.
This works in a similar manner to equity-based crowdfunding, but instead businesses offer investors the chance to loan monies, typically in return for a fixed rate of interest. The online platforms have proved popular as they match investors prepared to accept an element of risk in return for a much higher rate of interest than that offered by banks. The businesses raising finance are typically early stage businesses or SMEs who for various reasons may struggle to raise bank lending.
Although most platforms are focussed on traditional debt or equity opportunities, niche crowdfunding websites are also emerging, including those offering invoice discounting or factoring facilities through to philanthropic sites that provide opportunities to invest in community enterprises and goodwill projects.
Mercer & Hole’s Corporate Finance department has a strong network of connections with both traditional and alternative finance providers, so if you require assistance raising finance, please contact Phil Fenn (Corporate Finance Partner) or your usual Mercer & Hole contact.