Entrepreneurs have benefited from significant growth in alternative finance over the past five years. According to the British Business Bank’s Small Business Finance Markets 2019/20 report, between 2014 and 2018 the value of smaller business asset finance deals has risen 32% to £19.4bn, while the amount of equity finance increased by 131% to £6.7bn. In the meantime, however, traditional bank lending has remained flat.
Part of this is legacy from the financial crash of 2008 when bank lending evaporated. But Mark Brownridge, Director General of the Enterprise Investment Scheme Association which supports UK investors and small businesses, says that companies are also more aware of the range of finance options available.
Finance for agile growth
Mark says: “It isn’t always appropriate for early-stage companies to borrow as they may not have revenue and can’t pay off the interest and the capital."
He believes British businesses are following a trend established in the US where equity finance is much more mainstream, and where young enterprises are more open to giving a stake in the company in return for cash. “SME businesses are far more aware of equity funding as an option, and I think that will only increase in the future. A lot of businesses look across to the US and see the trend towards taking a lot of Venture Capital (VC) money, going big and quick with the fail fast kind of attitude – you can’t do that through bank lending.”
“Finance generally comes through a VC or fluid equity lending, and that kind of model is becoming more established in the UK where companies don’t just want to grow steadily based on revenue, they want to get a lot of investment and go quickly. You look at companies like Monzo and Revolut, and they’re taking a lot of equity funding and trying to get lots of customers and are not necessarily worried about revenue or profit."
The money raised from equity funds a range of things, often it is for cash flow and keeping the company running and paying wages, but it also finances new product development or entering new markets and taking the business to the next level.
Asset finance requires an asset to be loaned against and so generally favours manufacturing, engineering or transport-based industries. As a result, it tends to be used to invest in new assets such as machinery or fleet. Because there is security in the assets being refinanced or financed, there is plenty of flexibility with asset finance products, including seasonal payment structures.
You can find out more about how your business can benefit from alternative finance by speaking to a St. James's Place Partner.
What investors want
Investors, from VCs to angel investors, are looking at a broad range of sectors. However, Mark points to fintech, artificial intelligence, data analytics and public security as particularly popular areas at the moment. He says: “Different investors want to invest in different stages; some want to get right in at the first stage and be loose with the first wave of money and continue on that journey with the company and hopefully realise significant growth. Others don’t want to take early-stage development risk and want to come in later once the company has revenue and heading for profit."
Chris Barrett is an angel investor with a long and varied career spanning electronics, media, software development, and consultancy in the City of London. "Because of my background, I'm interested in media and financial ecosystems but also medical technology because of the fascinating crossover in different disciplines.”
Preferring to make his own investment decisions, Chris is not aligned to a syndicate, accessing deals both on crowd platforms and directly. He says: "It is unusual to see profit in the first few years, so patience is required."
While Chris is quick to filter out business ideas that don’t appeal or interest him, the people behind the concept are critical. “The entrepreneurs I work with are smart, and they need to have credibility. I look at the founders and figure out if they have the right stuff to follow their vision. They need to be agile and able to recognise if they’re going down the wrong route and pivot to the right opportunity."
While alternative finance can be more challenging to navigate than traditional bank lending, alternative finance providers understand the needs of SMEs and have specialist knowledge in a variety of sectors to support the business and their investment.
Please note that some of these methods for raising finance are unlikely to be the first options as there will be conditions attached to any agreement reached, which by their nature will be more onerous than those imposed by a mainstream lender.
The opinions expressed by third parties are their own and are not necessarily shared by St. James’s Place Wealth Management.