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SMEs are not banking on their banks

Getting access to financial lending hasn’t been easy for small and medium sized businesses (SMEs) since the 2007 financial crisis. Even now, banks seem reluctant to part with their cash. Yet, the latest results from SME Finance Monitor indicate that small businesses are actually shunning traditional lending from the banks in favour of alternative forms of finance. 77 percent of the 5,000 UK small businesses surveyed said they were profitable in the last quarter, compared to 69 percent in the equivalent quarter of 2013. And, three-quarters of those surveyed met the definition of ‘happy non-seekers of finance.’ With SME business confidence at an all-time high, banks certainly aren’t the be all and end all for SME owners wanting to get that all-important cash injection. With the UK alternative finance market growing to £1.74bn in 2014, what are the most popular funding sources available to SMEs today?

Turning to your peers

Peer-to-peer (P2P) lending is fast becoming a popular method for SMEs to give their business a boost in cash. This is where a business can use a website to borrow money from individuals who have invested in the service. Recent data from the Peer-to-Peer Finance Association showed that P2P business lending has grown by 250 percent in the last year alone.

Gaining traction from the masses

Raising capital online through a variety of backers, also known as crowdfunding, is also growing in popularity among SMEs: the market’s already worth £84m, up 201 percent year-on-year, and we’re starting to see lots of success stories come to fruition. Scotland’s largest independent brewery BrewDog raised £4.25 million in December 2013 as a result of crowdfunding, which has enabled the company to expand their presence nationwide.

Approaching financial experts

Recent research found that over two-thirds of SMEs expect their accountants to provide strategic business advice and counsel, as well as their standard bookkeeping services. As the role of the accountant continues to evolve, they are fast becoming an invaluable source to uncover the best ways of seeking new means of funding.

Using personal finances

Interestingly, last week’s SME Finance Monitor also revealed that 28 percent of the respondents are using personal funds for their business. Although it can’t always be a long-term funding option, it should be considered if the business owners are in a financial position to do so, particularly when other funding channels are exhausted. Any entrepreneur knows that a smart investment can make a huge difference to growth. They just need to make sure they’re able to keep going and that the business will be successful enough to get the return.

Keeping finances at the heart of your business

Once an SME has funding it’s vital to make sure they manage their finances effectively to sustain the business. This involves staying on top of critical processes such as invoicing, cash flow and forecasting. Many SMEs default to paper-based records or Excel spreadsheets to do this, but they can be time-consuming and complex to manage. Those that are really getting to grips with their finances are turning to smarter, cloud-based technology, that enable all processes to be managed from one place, automatically updated and accessed online, while providing greater collaboration. Adopting such an approach frees up time often spent on financial admin to focus on strategy and innovation, which will impact the bottom line.

Smarter bank lending

Although this quarter’s SME Finance Monitor suggests that the majority of small businesses aren’t using bank loans for funding, they should still be considered. To help with this, the Government has backed the recently launched, Business Banking Insight website that allows businesses to benchmark banks against each other and make recommendations from their experiences. According to a recent paper by the Department for Business, Innovation & Skills over 80% of UK small businesses only have relationships with the four largest banks. As the new website includes several challenger banks that are less well known to SMEs, it presents more options for businesses that can learn from peers and act upon their insight.

Last week’s report proves that the future is looking bright for SMEs. Small businesses now have a range of tools at their fingertips such as the Business Banking Insight website and alternative options to get that all important cash injection. But, whichever route they choose to go down, it’s critical to remember that managing finances is very much an ongoing process, which will determine the success of the business. This requires the right support from third parties as well as the right technology so it runs as efficiently as possible. In this way, SMEs can prosper regardless of the current banking situation and keep their bank balance firmly in the black.

This was posted in Bdaily's Members' News section by Rich Preece .