The Potential of the Crowd

SMEs across the UK have seen their funding options widened enormously in the last three years with the re-purposing of invoice financing, the growth of equity-based crowd funding and the unstoppable rise of peer-to-peer lending. The exact impact of the debt-based sector is hard to measure, but businesses in the UK have borrowed well over £120M through the crowd, and with loans from as little as £2,000 right up to several million for asset-based purchases, businesses of all sizes can access this cash making crowd funding an important part of their business growth strategy.

The premise of the market is simple; if there are enough people prepared to lend to a particular opportunity, a deal gets done. It’s a premise as old as time, but the difference is that the internet is enabling these arrangements, so businesses and lenders don’t have to physically be in the same place, creating a much broader pool of potential borrowers and lenders.

But despite the publicity (unusual routes to funding have captured the imagination of business journalists) the industry is in its infancy by comparison with UK businesses borrowing over £400Bn annually. The market is moving at quite a pace though, and very soon given the appetite of individuals to lend to businesses and more success stories emerging, keeping up with developments will be even more unrealistic for time-pressed business owners. Because of this, getting professional advice through an organisation like Advantage Business Partnerships is invaluable. If your business needs money to grow, you need to make sure you’re getting the right amount and type of finance. Because the industry still in its formative stage, there are businesses that are restricted to borrowing through the crowd – indeed, part of the industry’s success has been its low default rate (approximately 1.5 per cent, rising to a predicted 3 per cent) and this has been down to the type of businesses allowed to apply, currently restricted to limited companies.

One section of the market not serviced by peer-to-peer lenders is sole traders. Sole traders are an important aspect of the UK economy, in many cases bridging the gap between a hobby and a business in the first instance before growing and becoming a fully functioning SME, employing others and generating wealth. Online marketplaces available at eBay and amazon have afforded sole traders a viable route to market and given rise to the “5-9” job for people to try a new business around the security of their existing job.

However, early peer-to-peer lending platforms like rebuildingsociety.com, Funding Circle and thincats.com have limited loan applications to limited companies with at least two years of trading history. There’s logic here – for a lot of young businesses taking on a loan can be burdensome as repayments need to be accounted for, often before a reliable income stream has been established. But with increasing awareness and a growing number of individuals who have experienced the returns offered by lending to businesses and who understand the risks, there will be a market created where all types of businesses, including sole traders, can access the funding they need to grow and lead the UK’s economic recovery. In the future, the difficult part won’t be securing business finance; it will be keeping up with all the new options. Written by Nick Moules, Communications Manager, rebuildingsociety.com – a leading peer-to-business lending platform