Survey: Attitudes to alternative finance among British SMEs
50% of SMEs say that alternative finance is opening up new opportunities
That's the conclusion of UK Bond Network's recent survey into attitudes to alternative finance among British SMEs. Half agree that alternative finance is changing the face of SME finance, opening up new opportunities and democratising access to funding.
Among companies with an annual revenue of over £1.1 million, that figure rises to 74%.
The survey collected data from over 250 UK SMEs and exposes a dramatic shift in perception and awareness of alternative finance between companies whose last annual revenue was £1 million or under and those whose revenue was above that figure. It also highlights a concerning lack of awareness about alternative finance options among some businesses.
Overall results showed a positive attitude towards alternative finance and the ways it can drive business growth, along with some potential opportunities for alternative finance providers to increase understanding among business owners.
Access to finance slowing British business growth
Despite government schemes to encourage banks to lend to SMEs, access to finance remains a major barrier to business growth. 38% of all businesses say it is holding back business growth, and 63% of businesses with revenue over £1.1 million.
As over 70% of the companies surveyed employ more than 50 people and 60% want to fund expansion, this could be having a significantly negative impact on job creation in the UK.
Expansion is the biggest driver for seeking finance, followed by working capital. The latter is a bigger issue for companies with smaller revenues, as 24% of respondents from these firms cite it as their main reason for raising funds, compared to 17% of business with a revenue over £1.1 million. Companies with smaller revenues are more likely to use external funding to purchase assets, suggesting that for these enterprises securing finance is more likely to be vital for continuing rather expanding operations.
"This clearly shows that SMEs need easier access to fuel business growth and bring associated benefits to the whole economy,” says Christopher Maule, CEO & Founder of UK Bond Network.
68% of SMEs would consider using alternative finance
Alternative finance is claiming its place in the business mainstream. 68% of SMEs surveyed say that would consider using it now or in the future. Among businesses with a revenue over £1.1 million, that figure is 94%, compared to just 58% of smaller companies. “Alternative finance platforms are stepping into the gap left by traditional lenders and offer simpler and more flexible ways for companies to raise the finance that they need,” says Christopher Maule. “The amount raised by peer to peer business lending in 2014 is up by over 200% on 2013. We’ve seen a 600% increase in funding achieved through our bond auctions in this period and expect this trend to continue into 2015.”
Overall the most attractive factors for SMEs are lower costs, speed and more control. Again there’s a divergence between companies according to revenue. For those with a revenue of £1 million or less the biggest draw is lower costs (40%) while for those who report a higher revenue it is speed (23%).
Growing through debt vs equity
Across the board there’s a strong preference for growing business through equity rather than debt. Two thirds of respondents say equity would be their preference and this seems to be driven by existing financial constraints. 36% say that they want to keep cash-flow constraints low and another 31% don’t want to add to current debt levels.
Looking at the differences between companies with revenue over and under £1.1 million, these factors are more important for smaller businesses. Minimising cash-flow constraints is the biggest attraction of equity finance for 41% of smaller businesses, compared to 26% of larger ones. Only 17% of companies with higher revenues are motivated by not adding to outstanding debt, while for smaller companies that figure is 34%.
This strongly suggests that companies with revenues of £1 million or under are already feeling a cash-flow pinch, making it imperative that they can access finance, providing their plans are viable.
Alternative finance platforms don't just offer a way for companies to raise funding, they also provide an opportunity to create a community of brand advocates. 13% of bigger companies say this is the most attractive factor for them, compared to just 3% of smaller ones.
This might reflect greater awareness about the social aspect of alternative finance among larger businesses, or that cash-flow is simply a much more pressing concern for smaller companies.
54% of respondents who would rather finance their business growth through debt do so to retain ownership. It's a stronger motivating factor for smaller businesses too, with 62% wishing to keep full ownership, as opposed to 44% of larger businesses.
Firms with revenues over £1.1 million are more likely to want to use debt to release capital tied up in assets. 28% say this is why they would choose debt financing. In contrast this motivates just 4% of smaller enterprises.
A concerning lack of awareness
"When we asked respondents where they'd first heard about alternative finance, we became aware of a worrying discrepancy in awareness between SMEs with higher and lower annual revenues," says Christopher Maule.
Just 15% of business with a revenue over £1.1 million say they aren't aware of alternative finance, as opposed to 42% of smaller firms.
"When you consider that peer-to-business lenders have raised over £670 million to date in 2014, this lack of understanding of alternative finance could be having a serious impact on some SMEs, preventing them from growing, purchasing necessary equipment or reversing cash-flow issues," says Christopher Maule.
"Looking at the survey results, there's a clear correlation between understanding alternative finance, willingness to use it and a positive attitude towards the opportunities it provides."
How to increase awareness?
Increasing awareness of the alternative finance options available for SMEs doesn't just need to be targeted at business owners themselves. Survey respondents said that they are most likely to approach an accountant or professional advisor first to discuss raising finance (33%), followed by a bank (29%).
Government legislation which will compel banks to refer SMEs who they reject for loans to alternative finance providers and challenger banks is likely to increase awareness. However platforms shouldn't rely on this alone.
Given the large percentage of businesses who would seek advice from an accountant or professional advisor, there's an opportunity for alternative finance providers to build relationships with relevant industry bodies. This would be mutually beneficial; enabling financial professionals to give better advice to their clients while creating a pool of informed customers for platforms.
Encouragingly, 15% of respondents said that they first heard about alternative finance from a professional advisor, suggesting that there is already awareness among these professionals that could be built on.
Financial decision makers of businesses with a revenue of £1 million and under are ten times more likely to have first come across alternative finance through friends or family (10%) than those with a bigger revenue (1%). This suggests that there is opening here for alternative finance providers to develop awareness within SME communities, such as Chambers of Commerce, which could boost pick-up by word-of-mouth among SME business owners.
5th March 2015
By Ben Cohen