Business Management

Is alternative funding a sound option for business growth?

In the first six months following the UK Government’s relaxing of pension regulations last year, the over 55s cashed in more than £4.7bn ($6.7bn) of their pensions, at least according to the Association of British Insurers (ABI). Undoubtedly a few cruise ships and Spanish holiday lets were beneficiaries of this unexpected cash injection but surprisingly a large proportion of this money has been routed towards business investment. According to estimates from Clifton Asset Management, over £400m ($573m) has been ploughed into UK firms in the last six months.

The shake-up in pension regulation in 2015 was in part driven by the economic problems of the late Noughties but it has been the subsequent rigidness of the traditional banking system that seems to have fuelled the trend.

Steve Swindon, chief executive at digital mapping and travel time analysis firm Basemap, says that traditional bank financing is “more restrictive and requires personal guarantees”. Swindon was looking for a £60,000 ($86,000) capital injection to help fuel growth and turned instead to his pension, in the hope that this tactic will also help grow his retirement pot.

He’s not alone. Wales-based Nigel Roberts, founder of website design business imaginet, also took the pension route to help fund growth acceleration after banks refused to lend without the business having tangible assets.

“It’s a way of gaining ownership of your financial investment,” says Roberts, who has now used a pension-led funding scheme on three occasions to fuel growth.

As more older entrepreneurs fight for funding - entrepreneurial activity in the over-50s has risen by more than 50 per cent since 2008, according to the latest Global Entrepreneurship Monitor – we will perhaps see more pension-led funding solutions joining the growing mix of alternative funding sources.

Alternative forms of funding are of course not new but while pension-led funding appears to be securing a foothold among the UK’s more mature business owners, what does this say about business funding in general, and in particular the banks?

The ability to self-fund does remove the barrier of subjective curation or the computer tick-box approach often employed by the banking community. This of course tends to get even more restrictive at any sign of economic slowdown. Given the current rumblings from the IMF about the world economy, the fear is that banks and traditional investors will again grow nervous and restrict the flow of investment funds.

While on the one hand this is a problem for businesses, it is also an opportunity for disruptors. You only have to look at the success of crowdfunding to realise this: crowdfunded technology investment is expected to increase sevenfold to over $8bn by 2020, according to Juniper Research. As an alternative funding source it has proved invaluable and high-profile exits such as Oculus Rift (it raised over $2.4m in 30 days and sold to Facebook for $2bn) can only fuel confidence.

It has caught the attention of government too. The UK is currently running a consultation, looking at the state of play and what the government can do to support alternative sources of revenue for business including crowdfunding and peer-to-peer lending.

The aim is to formalise the alternative sources of revenue and potentially bring them under the existing regulatory umbrella (or new ones if the existing ones are insufficient). What this will do to the various sources remains to be seen but there is a determination to ensure that any government interference does not dampen competition.

According to the Intelligent Partnership, the issue is not so much a lack of options and competition, or even regulation but a lack of knowledge, particularly among the financial advisor community. Attracting new investors to the various schemes is the next big hurdle.

Following a survey last December, the company found that seven per cent of advisers surveyed realised that alternative finance is now regulated by the FCA, while only 13 per cent were aware that some platforms used contingency funds to protect investors from losses.

“When we asked platforms what they thought the biggest barriers that prevent advisers from investing in the sector were, the vast majority said that it was a lack of education and awareness,” says Guy Tolhurst, managing director of consulting firm, Intelligent Partnership. “So the alternative finance industry knows that it has to do much more to successfully reach out to the adviser community.”

So there is a disconnect and a need for greater understanding in alternative sources. So if this is the case, will alternative funding always be just that - an alternative?

John Goodall, co-founder and CEO of peer-to-peer lender Landbay, understandably believes that peer-to-peer lending “will cease to be viewed as alternative finance, but instead viewed as mainstream.” Of course, Landbay only operates in mortgage lending so its risks are different to business start-ups or acceleration but there would clearly be a knock-on effect if the methodology is proven.

Of course, crowdsourced equity funding is by far the most prevalent, especially in the tech start-up space. Despite its risks, the models are evolving quickly and it probably stands the better chance of any of being more widely accepted. According to James Codling of platform VentureFounders, crowdsourcing is maturing rapidly, with access to EIS and SEIS government tax relief as well as fund manager services.

“In the near future, demand from sophisticated investors will see the need for a model that bridges the gap between the less sophisticated crowdfunding approach and the more professional and mature private equity and venture capital markets,” says Codling.

So what does this mean to business owners? The message is that sources or revenue for existing or start-up businesses is growing. Banks and VCs are not the only avenues through which to find working capital and alternative options are worth pursuing. The problem for the moment at least is that you have to do your own leg work. The bonus of course is that it’s much needed competition for banks or perhaps it’s just a coincidence that December 2015’s report from UK banking association the BBA revealed that bank lending approvals for SMEs are on the rise again.


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Marc Ambasna-Jones

Marc Ambasna-Jones is a UK-based freelance writer and media consultant and has been writing about business and technology since 1989.

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