SMEs need access to finance to enable them to grow and develop their businesses. While traditional sources of finance, including invoice discounting, overdrafts, bank loans and private equity remain the solution for many, in recent years we have seen considerable growth in alternative sources of finance, such as crowdfunding, peer-to-peer lending, and retail bonds.

All of these alternatives operate by raising many small amounts of money from a large number of people, frequently via the internet.

Reward Crowdfunding

Businesses who seek finance via a reward crowdfunding platform typically offer a non-monetary return to investors in return for what is effectively a donation. These non-monetary rewards could range from a walk-on part in a film, attendance at cultural event, or a finished product. Kickstarter and Indiegogo are two of the better known global platforms, with Crowdfunder being a key UK player.

Equity Crowdfunding

Widely used by start-ups or relatively young businesses, equity crowdfunding platforms allow companies to pitch to potential investors, saying they need to raise a certain amount of money to develop their business and offering to give up a percentage of their shares in return. Potential investors can then choose whether or not to pledge funds on that basis. Crowdcube and Seedrs are the dominant players in this space in the UK, but there is also a myriad of niche platforms all trying to carve out their own area of specialism. Some larger companies have opted not to use one of the platforms, but market their share offers direct to potential investors. One of the best known examples of this, is BrewDog, who have raised several million £ from lovers of its craft beers in what they call their “Equity for Punks” share issues.

Peer-to-peer Lending

Peer-to-peer lending platforms allow established businesses with reasonably predictable earnings and a credit history to state their requirements for funding – how much they want to borrow and what for. The platform then undertakes some due diligence and effectively credit scores the business and assigns it a certain level of risk. Potential investors bid in a reverse auction to say how much they are interested in lending and what rate they want on their money. The interest rates that come out of this process are higher than the wholesale banking market, but that may be traded off against the fact that loan applications can be filled within a matter of just a few days and the loan term is extremely flexible. Funding Circle are probably the biggest player in this market in the UK, but there are a number of others.

Retail Bonds

Bonds are essentially an IOU debt instrument issued by a company. The purchaser of the bond receives a fixed return each year for a set number of years, at the end of which time the bond can be redeemed. Some businesses have chosen to market retail bonds via one of the crowdfunding platforms mentioned above, taking advantage of the marketing reach that these platforms have, while other companies have chosen to market these bonds themselves, typically via their existing customer databases. A number of companies have been creative in framing the offer to potential investors. Hotel Chocolat raised £4m through a retail bond from 100,000 members of its Chocolate Tasting Club where the interest was paid in the form of a monthly box of chocolates. Naked Wines raised £5m from members of its fine wine club where the investors could choose either to receive 7% annual interest on their loan, or a 10% discount on wines purchased.

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