Why SMES Need To Use Alternative Finance
Small and medium enterprises (SMEs) are the drivers of development in the contemporary world. SMEs are key in terms of job creation and fostering economic and social development, in advanced economies but as well in emerging markets. Nevertheless many SMEs struggle to find funding and are still unaware of the rich array of alternative financial options.
Small and medium-sized businesses, who are most of the times owned by a single person or a small team of entrepreneurs, not only are a driving force in job creation, but provide as well family stability and local economic development.
Financing small and medium-sized enterprises (SMEs) has been going through a profound revolution. These are challenging times for financial institutions, for a number of reasons, and SMEs, lack enough information about funding alternatives.
A number of factors affect the flow of SME financing. Developed countries approach and support SMEs in different ways. If some countries tend to have a more neoliberal approach with little governmental incentives for SME financing, others use government guarantees and other measures to offer fintech driven solutions to reduce risks and costs.
In emerging economies, to date, most SMEs (including formal sector firms) are financed from sources outside the traditional formal financial sector, which is expensive for the enterprise and can hamper the flow of financing, thus hindering its growth. New capital requirements and banking regulations imposed on financial institutions worldwide are making the financing of SMEs even more difficult and expensive. But this landscape has been changing in the last years with the emergence of alternative finance solutions based in new creative business models out of the conventional banking system.
These new alternative finance players are offering innovations in SME that are offering new possibilities in:
- Supply-chain financing solutions and governmental and non governmental procurement;
- Use of technology fintech solutions to reduce risks, enhance efficiency leading to lower costs through use of simple software as a service;
- Securitization and other means of obtaining capital relief for traditional sources of finance, using creative but secure insured solutions that create value for business owners out of the box of conventional finance;
- Introducing non-traditional sources of long-term capital such as crowdfunding, equity finance, trade finance, non secured loans;
- Capacity building for both financiers and SMEs through advanced business models that explore the creation of value through more open business models.
SME alternative finance is thus a dynamic area that business leaders need to explore, as it offers critical new roles in creating opportunities, generating income, as well as creating new jobs opportunities.
SMEs need to use alternative finance and understand what this term “alternative finance” means. Alternative finance is a concept that serves as a way of raising funds for SMEs or its related course without using the usual or traditional methods – which is conventional corporate banking. This is to tell you that potential funders or those hoping to be one are looking up to online sites or any other alternative that will make their dreams a reality.
SME Finance in UK
According to data released by the UK Government states that in 14 October 2015 the UK SME sector is fast growing.
- There were a record 5.4 million private sector businesses at the start of 2015.
- This is an increase of 146,000 since 2014 and 1.9 million more since 2000.
- The number of employing businesses increased by 35,000 and the number of non-employing businesses by 112,000, with the annual growth for both groups being around +3%. SMEs and the Economy. Small businesses accounted for 99.3% of all private sector businesses at the start of 2015 and 99.9% were small or medium-sized (SMEs).
- Total employment in SMEs was 15.6 million; 60% of all private sector employment in the UK.
- The combined annual turnover of SMEs was £1.8 trillion, 47% of all private sector turnover in the UK. (Further detail in: https://www.gov.uk/governm ent/collections/businesspopulation-estimates)
The composition of the business population of SMEs in UK is quiet dynamic and one of the key driver of its economy:
- In 2015, there were 1.3 million employing businesses and 4.1 million nonemploying businesses.
- Therefore, 76% of businesses did not employ anyone aside from the owner.
- The overall business population includes three main legal forms: there were 3.3 million sole proprietorships (62% of the total), 1.6 million companies (30%), and 436,000 ordinary partnerships (8%).
- There were 2.4 million businesses registered for VAT or PAYE, 44% of the total population. A further 3.0 million are not registered for either VAT or PAYE.
Trends in the business population:
- There has been sustained growth in the total business population, with increases of +55% since 2000 and +3% since 2014.
- The majority of population growth since 2000 has been due to non-employing businesses, which accounted for 90% of the 1.9m increase.
- The growth in numbers of businesses last year reflected the composition of the business population in 2014, with non-employing businesses accounting for three quarters of the overall 146,000 increase.
- The number of companies has increased in recent years and increased again in the last year by 117,000 (+8%).
- In contrast, the number of ordinary partnerships continued to fall, with a 21,000 (-5%) reduction from 2014. The number of sole proprietorships increased by 50,000 (+2%).
So why SME alternative finance should be encouraged as a critical business solution driver.
- Allows controlled and secured growth of an SME – more working capital and better cash flow management allows an business owner to be aware of its problems and solutions, keep in control of the day-to-day running costs of the business, whilst growing a fulfilling larger orders in a calling way with a company that will support you and in a way that ordinarily wouldn’t be possible.
- Allows a possibility of Higher profit margins – trade finance alternative solutions offers finance facilities can allow an SME to buy in bulk or volume, up front (at reduced costs) and strengthens the relationship between its buyers and sellers. This can be an opportunity to increase profit margins and EBITDA but also while having a second partner controlling costs and being on top of eventual issues and calculating risks.
- Offers a greater efficiency and increasing productivity – using alternative finance opens new calling ways and opportunities for working with other international players, it allows business owners to diversify their supplier network in a financed controlled way which increases competition and drives a sound efficiency in markets and supply chains.
- Through use of different monitoring solutions and partnership it Reduces bankruptcy risks – Alternative finance obliges business leaders and owners to be much more controlled in their operations and managing late payments from debtors, bad debts, excess stock and demanding creditors that can quickly cause the crippling of an SME which is reliant on effective cash management in order to stay alive. Therefore having an alternative finance in place can support any SMR in its management of external financing or revolving credit facilities that can ease this pressure and prevent an SME from these systemic and structural risks.
To summarise 5 points that highlight the importance of alternative finance for SMEs:
- The Value Of Alternative Finance Market Is Increasing
Now that there’s an increase in the value and offer of alternative finance market, it means there is high percentage of reliability and potentiality for raising funds, manage solutions for convincing projects. That is also to tell you that, SME finance will move a step further and improve greatly if alternative finance is adopted.
- Alternative Finance Offers Opportunities For Unapproved Project
It is important to know that whatever situations a SME is it may warrant the traditional funding system through banking not to approve funds for a propose project due to reasons best known to them. SME alternative finance will be the solution in that kind of situation, because the viability of raising funds through several means is 90% assured.
- The Passion To Raise Funds Across Wide Range Of Platform
In alternative finance, there are teams of creative volunteers, out of the box solutions who are always willing and ready to initiate and work with clients in order to raise funds for convincing projects. Sometimes, banks may tell you that they have not budgeted or planned on a particular issue that’s at a pressing end, but in SME alternative financing, there’s no way a pressing need will be issued without getting assistance from somewhere.
- It Simplifies Funding
You don’t need a soothsayer to tell you that the alternative finance is, at present, the best way you can raise fund without any hassle. They make the fundraising campaign more of a democratic process where there are plenty of options, because they can have as much as broader appeal in the process. This so good enough, as it’s not just restricted to high-net worth individuals but to the broader community.
- Alternative Financing Is Real Option For Fund Raising
The SME finance should see the alternative finance as an open-field where reality is at its pick. Everything is done openly and those that have the opportunity to take their chances will have all the reasons to smile.
In conclusion, it’s important to know that there are many reasons why SMEs need to use the alternative way of financing for development projects, however, the five above can stand anywhere to make people understand the importance of adopting alternative plans for SME finance.
Alternative Finance is a critical area for any business owner of a SME to start using and acting on.
Maria Fonseca is the Editor and Infographic Artist for IntelligentHQ. She is also a thought leader writing about social innovation, sharing economy, social business, and the commons. Aside her work for IntelligentHQ, Maria Fonseca is a visual artist and filmmaker that has exhibited widely in international events such as Manifesta 5, Sao Paulo Biennial, Photo Espana, Moderna Museet in Stockholm, Joshibi University and many others. She concluded her PhD on essayistic filmmaking , taken at University of Westminster in London and is preparing her post doc that will explore the links between creativity and the sharing economy.