Never mind the Brexit: Alternative finance offers a route to prosperity

Despite uncertainty surrounding Brexit, more than half of UK businesses are planning to grow, as technology-led investment plugs the funding gap

It is a little over a decade since Northern Rock became the first UK bank in 150 years to fail because of a run on its deposits.

For a brief moment it looked as if the entire global financial system might collapse overnight, with only government intervention and billions in bail-outs preventing a worst-case scenario.

Bowed and chastened by the global financial crisis, banks were forced to review their lending practices, with the resulting ‘credit crunch’ cutting off the supply line of cash which small business owners had relied on to fund expansion.

According to data from the Office for National Statistics (ONS), the number of small businesses that were successful in their attempt to get a loan fell from 90% in 2007, to 65% in 2011. With few other options available to them, small business owners had no choice but to tread water.

10 years on and the UK’s decision to leave the EU has ushered in a fresh wave of uncertainty. Whilst this current bump in the road is on nothing like the scale of what we saw in 2007, confidence has taken a hit. According to our latest research, just 43% of small business owners see trading conditions improving in the coming year.

Meanwhile, 52% of start-up business owners say they do not think banks will continue to lend at the same levels in 2018.

And yet the prospect of choppy waters ahead appears to have had little impact on their plans for growth. More than half of the 1,000 small business owners we surveyed say they are planning to grow or expand their business in 2018. What’s changed?

Alternative finance: a plug for the funding gap

When the financial crisis hit, it shone a light on how limited the options were to access vital funding. So, when traditional funding methods dried up, there wasn’t much small businesses could do, but to put their ambitions on ice.

Technology players were quick to spot a yawning gap in the market, prompting a wave of innovation in the financial services sector. The resulting boom in alternative finance means that today small businesses have an array of options available to them, not just in terms of whom they approach for funding, but how they structure repayments.

Alternative financing is the umbrella term for a relatively new, technology-led approach to funding. It covers everything from peer-to-peer lending (lending money to individuals or businesses through online services that match lenders directly with borrowers) to equity crowd-funding (funding a project or venture by raising monetary contributions from a large number of people, often performed via internet-mediated registries).

These alternatives to traditional forms of lending are proving particularly popular among the 96% of UK businesses that employ fewer than 10 people.  According to our research, 40% of start-ups and younger business owners say the growth of alternative finance options has made them less reliant on banks for funding.

A cash advance for short-term growth

One model proving popular is the business cash advance, such as Worldpay Business Finance, which offers business owners an unsecured ‘cash advance’ based on their future credit and debit card sales.

Payments are made on the basis of a pre-agreed percentage of the business’ card transactions, so business owners only pay when they are earning and don’t face the stress of having to meet a regular monthly payment if business is quiet.

This flexible model of finance includes no fixed term and unlike traditional “loans”, business owners will not face penalties for failing to make a payment. Furthermore, if the advance takes longer to pay off, the originally agreed payment costs remain the same.

This flexible approach to finance is particularly attractive to businesses looking to invest over a relatively short period, either to make improvements, or to buy stock in advance of a busy trading period; the retailer wanting to stock up on a particular item prior to Christmas, or the restaurant that wants to give their venue a fresh lick of paint before New Year.

Pub owner Simone Taylor is one small business owner who found that a cash advance was the best way for her to continue to grow her business, The Golden Lion gastropub in Keswick. Hit by severe flooding in December 2016, Simone sought additional funding to bridge the gaps in her cashflow, and fuel business growth by expanding her food menu.

The worst thing any business can do during a period of uncertainty is stand still. It is incredibly encouraging then that so many of the UK’s are pressing ahead with exciting plans for growth in the coming. Even more encouraging is the fact that the infrastructure is now in place to nurture this growth.

Banks still have an incredibly important role to play in supporting growth among Britain’s five million small businesses, but they no longer have to shoulder that responsibility alone. It is up to small business owners to ensure they fully understand the options available to them.