Peer to peer lending and crowdfunding solutions are increasingly becoming part of the mainstream lending sector. While there have been some high profile examples of large scale equity campaigns, such as those run by BrewDog, these alternative sources of funding now offer licensees a viable option for raising finance for pub businesses. Adrian Wenn, consultant at Integritas Financial Solutions Limited, explains.
While interest rates remain at historic lows and the prospect of any increase is not forecast until at least 2017, many commentators feel the finance environment is ripe for supporting good projects for expansion and development. However, for many in the licensed trade the conventional funders remain less than supportive. Many of the High Street bankers are constrained by credit policies that restrict lending in particular business sectors and if bricks and mortar security is not available the answer is most probably ‘no’. Also, many business owners do not know who their bank manager is and arranging a meeting can be time consuming and frustrating. Then there is the time commitment in preparing for these meetings and providing the financial information requested, which can be considerable, while the wait for an answer is quite often measured in weeks.
Following the Credit Crunch the environment was right for an alternative source of funding. As a result, crowdfunding and peer-to-peer lending exploded into life as trust in banks deteriorated and they became more reluctant to lend. As far back as 2004, Zopa was set up and is reckoned to be the world’s oldest peer-to-peer lender. Funding Circle was established more recently in 2010 but has already lent more than £1billion to UK firms.
As peer to peer lending and crowd funding have become more mainstream a significant proportion of small business owners are now successfully using them as a reliable source of financial support for their businesses. And while investors and savers have been seeking increased returns on their investments the number of lending platforms has grown significantly. Until recently these platforms were seen as a marginal source of funding, however they now rank as the third largest net lender to small businesses in the UK. The mainstream acceptance of these new platforms is further demonstrated by many of the traditional banks now referring ‘declined’ cases to them to provide an acceptable funding solution for their customers.
The sector is showing no signs of reaching its peak just yet either. In the UK, over 100,000 people are directly lending to business via these platforms and this investment is being supplemented by further direct funding from the UK Government backed British Business Bank, local authorities, Universities and larger Financial Institutions and investors. As we move into 2016, it is expected the growth in funding availability will be further enhanced with the Government’s creation of the Innovative Finance ISA. Due to be launched on 6th April it has been created to enable private investors to place funds with Crowdfunding and peer to peer lending platforms in a tax efficient way. As a result, most financial commentators expect in excess of £1 billion to be lent by the sector this year.
These alternatives are not just for new product launches or selling shares in a business either. While the largest individual amounts raised from Crowd Funding campaigns have been for equity investment, the largest volume of deals have been for the provision of loan debt. With amounts advanced from £5,000 upwards, the independent licensee need not be concerned about the lack of availability of conventional security and can check their businesses eligibility within just a few minutes. While another advantage over traditional lending comes from the investment in these new platforms, which can enable fund raising to be completed within a few days.
Interest rates are dependent upon the financial standing of the business, the loan amount and the term much like traditional lending, but rates will typically vary between 8% and 18%. While these rates are generally higher than more conventional funding it is balanced by the swift availability of facilities. As further investment is attracted to the sector and lending assessment experiences are reviewed, it is expected that rates for better quality businesses will reduce further in the coming years.
There are other advantages too. Peer to peer lending provides business owners with the opportunity to present their business plans directly to potential lenders and a number of platforms provide the opportunity for potential lenders to direct specific questions to the business owner. While the approach also offers a unique opportunity for business owners to promote their proposition to existing customers of the business. Many customers are happy to support local businesses which can result in greater customer loyalty and support.
So peer to peer funding and crowd funding increasingly offer a viable option to licensees looking for investment. Applicants can access these platforms and apply directly, but there are brokers like Integritas* that can support them using their experience of the peer to peer sector and knowledge of the application processes, which helps to move suitable applications quickly to a successful outcome. This is something of increased significance when a larger, potentially more complex, investment is being sought.
*Integritas Financial Solutions Limited is authorised and regulated by the Financial Conduct Authority.