You would think that young innovative companies would be growing by now but few are. Instead, total business lending fell by £3.8bn in August. After repeated drops for months, this is the largest drop since December of 2012. The bad news is that these numbers demonstrate that Britain’s business financial system remains broken and getting worse.
The largest and longer established companies are easily receiving all thefinancing they want. It’s the medium and smaller companies that cannot get bank financing. The ones that want to and should be expanding.
Alternative Financing for Medium and Small Businesses
The government has attempted to encourage lending to medium and small businesses. However, the Funding for Lending Scheme (FLS) has failed because lending to this vital part of the economy has steadily declined for the last two years.
The more proactive businesses are looking beyond the traditional bank loan to alternative funding sources. Some of the more popular alternatives include crowdfunding, invoice financing, and peer-to-peer lending.
Invoice financing is among the most flexible and is highly favored by companies attempting to grow rapidly. Invoice funding is when the company is owed money from a distributor, retailer, or another company. The invoice has been sent but the money has not been received. The invoice is sold on a secondary market at a discount. The company selling the invoice improves cash flow and the person or business buying the invoice earns a decent rate of return on the investment.
Asset Based Lending
Another popular alternative funding method is asset based loans. Private money is loaned with the loan being secured by the company’s plant, equipment, machinery, stock, or property.
According to the Confederation of British Industry (CBI), approximately 43,000 businesses are engaged in some form of private asset based lending. This is up 6% from last year and these private loans are valued at approximately £17bn.
Peer-to-Peer and Crowdfunding
These innovative private financing schemes are typically used to finance specific projects rather than for working capital. Maybe to expand a factory or to purchase new equipment or open a few new shops.
The most recent data shows that approximately £1.7bn has been made available to medium and small businesses through peer-to-peer funding and crowdfunding. In fact, the government specifically made £30m available for peer-to-peer loans back in December of 2012.
Overall, this still represents a pittance of lending needed to grow the small and medium business sector. Only about 2% of the sector has applied for alternative lending.