The non-bank lending sector has grown in popularity with smaller, growing businesses mainly because of the added value it brings and because it comes with fewer strings attached.
Alternative lenders have simplified the funding application process, making life much easier for SMEs giving them quick access to small amounts of money, without the need to fulfil more time-consuming due diligence checks required by traditional lenders.
There are two main types of alternative lenders in the market. Peer-to-peer lenders offer debt funding to established businesses, helping them to grow. There are also start-up crowdfunding platforms such as Crowdcube and Seedrs, which provide equity and investor expertise to entrepreneurs with new business ideas.
Ross Cocker, corporate finance partner at Birmingham accountancy firm Clement Keys, said:
"SMEs in the region have grown more confident about using alternative lenders and this is changing the lending landscape.
"While an increasing number of SMEs are using alternative lenders for small loans, banks are by no means out of the picture. Many are demonstrating that they are willing to complement this activity by providing additional funding and taking on a proportion of the investment risk.
"The main advantage for SMEs using peer-to-peer or crowdfunding loans is the speed of access to funds and business mentors. Using these platforms, lenders are able to carry out their own credit checks simply and easily and the individuals who lend the money determine interest rates. Traditional lending carries greater cost and time constraints, as banks need to see a business plan and trading information as well as carry out a due diligence review."
Earlier this year, the Government announced that it is investing another £40m in peer-to-peer loans company, Funding Circle, as part of a move to increase non-bank lending options. There were concerns among SMEs that they may try to tinker with peer-to-peer lending by introducing regulations and making such funds harder to access. However, to date, the Government appears to be letting the market run its own course.
Ross Cocker added: "There are very few barriers to using alternative lending providers. The only risk that business owners run is borrowing from ‘less-established’ providers. We have seen a handful of non-bank lenders set up and disappear from the market and firms should err on the side of caution. When considering alternative forms of lending, we would point lenders in the direction of more reputable platforms as a first choice."Crowdfunding and peer-to-peer lending are valuable options that entrepreneurs and growing businesses should consider and we can expect to see more of this type of financing deal in the future."
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