- ‘Crowdfunding’ has emerged as an alternative to bank loans
- Businesses can receive funds without the time and hassle of the traditional bank route
- It can give smaller businesses more choice
The SME lending market is tough, especially at the moment. In the wake of the economic downturn, high-street banks have tightened their purse strings, often requiring owners to put their homes up as security and provide detailed proof of the company’s history and prospects. This process can take months, which can seem like forever in the fast-moving world of business. And for those businesses that do make the cut, interest rates can be punishingly high.
That’s why small and medium-sized businesses are increasingly turning to alternative sources of financing. While banks are still the go-to sources for companies looking to cover losses, SMEs that need a little something to help them grow are looking elsewhere.
Funding Circle is one example of the innovative ‘crowdfunding’ market that has emerged. Its funding comes from its 10,000 members, who can review each investment opportunity and decide whether to invest, how much they want to invest and at which rate of interest. The application is done online and successful companies receive their funds in weeks, rather than months.
The benefits to this approach are twofold: the investors have the opportunity to receive much higher returns than they might get from a stock or a savings account, and the companies receive much-needed funds without the hassle of the traditional bank route.
According to Funding Circle’s co-founder, James Meekings, the aim is to have a dialogue with the businesses that are searching for funding, rather than a top-down ‘Yes’ or ‘No’ decision. “The whole proposition is listening to businesses and finding out what they want,” he says. “With traditional sources of funding, SMEs get a raw deal. And if getting finance is a hassle, they’re less likely to hire, which affects economic growth.
“Large businesses can go to the stock exchange or the capital markets, but small businesses don’t have those options. They needed more choice.”
Mike Steel, owner of Eagle Vending, Rochester, Kent
“In 2009, there was a big fire next door to us and it caused major disruption to the business. To fight back from that, we needed a cash injection of about £25,000 to launch a new product into the education sector.
“At the time, bank loans were nonexistent. None of the high-street banks wanted to help – not our main bank, not the second or the third. Then we heard about Funding Circle and it all happened very quickly.
“The process was easy. Finding Circle looks for the same criteria as the banks in terms of a business plan and accounts, but doesn’t require the same level of security – you don’t have to put your house up, which is something that puts SMEs off in the current climate. The paperwork was simple and all done online, without the rigmarole of meeting with the bank manager. From start to finish, it only took a couple of weeks to get the funds.
“It was only a small amount, but it did make a big difference to the business at the time. Trading this year has been excellent for us so far.”