Could crowdfunding fill the funding gap for SMEs?

– by Cathie Sellars –

With the economy still recovering from recession, many assume that the funding gap for new businesses has arisen solely as a result of banks being unwilling to lend money to new ventures, which are perceived as being too risky.

While this is undoubtedly a key contributor, our research, in conjunction with Knowledge Peers, highlights a number of other inefficiencies arising in the allocation of SME capital, which gives a clear opportunity to develop new sources of finance, like crowdfunding.

pick_n_mix

Courtesy of Wyecliffe Galleries

Our research shows that funding ‘general growth’ is the biggest reason why SMEs seek external finance; a need which is not currently met by the existing funding packages on offer. While firms require a ‘pick ‘n’ mix’ offering of financial solutions, in order to find those that best match their growth projections and spending plans, they are often given a blanket solution with unspecified financial advice.

SMEs are therefore forced to choose from a small number of everyday banking products, like secured loans and overdrafts facilities, which are becoming increasingly unpopular, with entrepreneurs less willing to leverage their personal assets when securing funding – they instead want a solution that works both on a business and personal level.

The next obvious SME funding opportunity is private equity or business angel investment – while this is generally more expensive for new start-ups, cost isn’t necessarily a huge barrier in their decision process, with just half of respondents agreeing that “financing is too expensive for UK businesses”. However, our research shows that SMEs often struggle to find the right investors for their business, while funders struggle to find suitable entrepreneurs to finance. Our research also shows that the slow speed of securing funding was a key barrier to SMEs seeking external help.

By bypassing venture capitalists and institutional investors, crowdfunding allows SMEs to work with a wide network of individual investors, even householders, who can provide immediate funds without necessarily adding additional expertise or support. Being online, access is instant, allowing deals to occur in a matter of minutes.

Only recently, the film finance company Glentham Capital, owned by financier Nicola Horlick, raised £150,000 in 22 hours via crowdfunding, which encouraged her to set up her own funding network, Money&Co. These networks work on both levels, allowing entrepreneurs to access a ready source of growth capital, while giving householders and investors the opportunity to make higher returns than they might via a high street bank’s lower-yielding financial products.

Interest in crowdfunding is clearly evident amongst SMEs – 73 per cent of our research respondents said the sector was a valid way to seek funding, while 72 per cent felt it was an efficient way to access growth capital. However, take-up is still limited – 76.5 per cent of SMEs were aware of crowdfunding but had not yet applied for investment in this way.

This seems be to a result of financial advisors failing to mention crowdfunding when discussing their client’s available options, with 87.5 per cent not doing so; this either suggests that marketers are not pushing crowdfunding hard enough to the right channels, or that financial advisors are uncertain about recommending it.

Rete

Courtesy of LancianoNews.net

As with anything online, crowdfunding networks provide an element of security risk –with new websites appearing every day, it’s only natural to be apprehensive about something so new. However, The Financial Conduct Authority is taking a keen interest in the sector and hopes to help educate investors about its potential risks and rewards. Money&Co vet all its network’s enterprises while offering guidance ratings to investors, from one to five stars, allowing more informed funding decisions to be made.

However, most significantly, while 25 per cent of our respondents’ total funding was derived from business angel investments, zero per cent was through crowdfunding networks or P2P lending. This clearly shows that the sector has a long way to go just yet – a disorganised SME finance market requires a more tailored approach, taking into account individual business needs and rapidly changing environmental conditions.


Cathie_SellarsCathie is the head of Workspace marketing. Workspace is London’s leading provider of space to new and growing businesses, Cathie started her career agency side in 2004 at Datography who specialised in residential marketing.  In 2008 she joined Workspace.

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