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Finding alternative sources of small business finance


There’s more to business finance than the big banks. But it’s a case of knowing where to look.

The Small Business Finance Markets 2014 report produced by the Government-backed British Business Bank found a lack of awareness among smaller businesses of the full range of finance options open to them.

We take a closer look at the alternative sources of business finance available.

Peer-to-peer (P2P) lending

P2P lending allows businesses to borrow money from other people online.

As industry body the Peer-to-Peer Finance Association puts it:

“Through peer-to-peer lending… businesses and consumers can ‘rely on each other’ for lending and borrowing services, providing lenders and investors with attractive rates of return, and creditworthy borrowers with competitive access to finance.”

According to research by Nesta, the UK’s innovation foundation, the average P2P business lending loan size is £73,222 and it takes approximately 796 transactions from individual lenders to fund it.

But it’s not just individuals’ money which funds P2P business loans.

The government-backed British Business Bank, councils, Huddersfield University and mainstream financial institutions all lend money to businesses via Funding Circle, the UK’s largest P2P business lender.

Find out more on the P2PFA website.

Crowdfunding

This emerging alternative form of finance allows businesses to raise small amounts of money from a large number of people, typically via online platforms.

According to Nesta, there are four distinct types of crowdfunding:

Donation – Contributors support a project they care about and do not get anything in return. This type of crowdfunding is popular with those who raise money for social or charitable projects.

Rewards – Allows people to contribute to projects and receive non-financial rewards in return. For example, funders of an album by their favourite band might receive advance copies.

Debt/loan-based crowdfunding – Businesses seek loans from the crowd, with members of the crowd taking small chunks of the overall loan. Peer-to-peer lending is a form of debt crowdfunding.

Equity – Equity crowdfunding give backers a small stake in the business in return for their contribution.

To find out more visit CrowdingIn.com, a directory of crowdfunding platforms available in the UK, and the UK Crowdfunding Association.

Credit unions

Credit unions are financial co-operatives set up to benefit their local community.

Credit unions typically offer savings accounts and loans to individual members but this now includes businesses following a law change.

Frank McKillop, policy manager for the Association of British Credit Unions Limited (ABCUL), explains.

“Credit unions have always been able to make business loans to sole traders but the law was changed in 2012 to allow credit unions to make loans to corporate members too.

“A number of credit unions are looking to have all the necessary procedures in place to start offering loans to small and medium-sized enterprises.”

“Some credit unions have a proud track record of making loans to small businesses. This is especially true of industry-focused credit unions such as those serving taxi drivers.”

To find out more visit www.findyourcreditunion.co.uk.

Community Development Finance Institutions (CDFIs)

Community development finance institutions (CDFIs) provide fair and affordable loans to businesses and people who struggle to get finance from high street banks.

They are social enterprises that invest in customers and communities.

CDFIs lend to businesses which provide vital goods and services to local communities, such as local retailers, IT providers, hair salons, and building contractors.

There are around 60 CDFIs across the UK and in 2014 the industry lent a record £72 million to more than 13,000 businesses.

The majority (73%) of CDFI customers were microbusinesses with fewer than 9 employees.

But it’s not just about the money, CDFIs can provide businesses with help and advice too.

Ben Hughes, chief executive of industry trade body the Community Development Finance Association (CDFA), said: “Lending is only part of what CDFIs do.

“The financial support and on-going relationship management that characterises CDFIs is what makes them stand out in an industry increasingly reliant on virtual, ‘faceless’ delivery models.”

The funding for CDFIs comes from a variety of sources including loans from commercial and social lenders and grants from local, central and European government, trusts and foundations.

To find out more visit Finding Finance.

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