Home Business NewsFinance News The problem with banks: why tech SMEs should go alternative

The problem with banks: why tech SMEs should go alternative

11th Jul 17 3:02 pm

Here are some options

We’ve seen an increasing number of tech IPOs in recent months, reinforcing the fact that companies in the sector can rapidly achieve high levels of growth. The UK has a strong tech scene, and needs to maintain its lead post-Brexit by ensuring small businesses have enough finance to grow.

The UK’s tech start-up scene is rightly seen as a proud achievement. In London particularly, there’s a very strong scene built around Silicon Roundabout, with hundreds of new companies launching every year. According to Tech Nation 2017 investment in the UK was £6.8bn last year, which is more than double that found in any other country in Europe. France, in second place, only secured £2.4bn.

If you’re a mid-sized tech company you may find it much harder than zippy new start-ups to get access to the finance you need. Once a business graduates from sexy start-up full of promise and astronomical growth models into a steady going concern, with all the everyday issues that come with that, it often becomes more difficult to attract the interest of investors.

For the mid-market, securing growth funding is a real challenge. Instead of relying on VC and the banks, companies need to broaden their options and look to alternative finance options like peer-to-peer lending (P2P) to provide the quick, dynamic funding they need.

Venture capital loves start-ups

Venture capital tends to gravitate towards tech companies in the early stages of development, looking for the next Uber or Whatsapp. However, for companies with a few million in turnover and a more accurately predictable growth rate, that VC interest begins to turn away in favour of shinier new companies, making it hard for established companies to achieve their goals and fund new projects.

There’s another problem: even if you can attract VC investors, the more investment you take on, the more diluted your share in the company becomes. That’s a necessary evil, but as a mid-market company you might not want to sign away even more – you’ve probably made sacrifices along the way already, so why add more if it’s not absolutely necessary? Add the fact that VC funding often takes years to come through, and the prospects for mid-sized SMEs don’t look great.

Banks are still too nervous

At the other end of the scale, the traditional banking fraternity is equally unhelpful, but for the opposite reason. Rather than looking to back the next big sensation, the banks remain extremely nervous after the 2008 crash, and are cagey about handing out loans to mid-market companies that don’t have multi-million pound security. Loans that are approved often come with punitive terms, a lack of flexibility and small chance of an increase or extension. For companies trying to react quickly to the market, that makes it hard to remain flexible and seize new opportunities.

In short, many mid-market tech companies are ignored by VC because they’re not edgy enough and declined by the banks because they’re not secure enough. But these mid-sized companies are the backbone of the UK’s tech scene, the crop of successful brands which made it out of the initial scrum and built a steady income and a route to profitability. Real success for the UK tech sector means helping these companies keep going on that route – so how do they find the money to grow?

P2P: the way forward

The answer is that they need to widen their outlook and go beyond the usual funding routes. By going down the peer-to-peer lending route, mid-market companies can get access to funding much faster, with a far greater level of flexibility and a much lower minimum threshold for borrowing. The crowd can provide rapid, impartial funding to businesses with a clear path to profit where traditional banks are too cautious to invest, and small P2P platforms can provide a more personal, face-to-face service.

Mid-market companies may not need an injection of several million – they may need money in stages, say hundreds of thousands now, and hundreds of thousands more in six months’ time in order to fund specific projects. P2P gives them the ability to borrow in stages, or to increase their loan after a few months if they need to. What’s more, by selecting a P2P platform that secures its loans against recurring revenue, businesses with a steady income stream can avoid having to put up all of their assets or personal property as security.

Tech SMEs are an essential part of the UK economy, a positive influence and a source of new innovations. It’s important that they can access the funding they need in order to achieve their growth goals. With banks remaining unwilling to open their coffers in the aftermath of the financial crisis and the uncertainty of Brexit, tech SMEs need to look beyond traditional funding routes and use P2P lending to finance their vision.

The tech sector is famous for its sense of adventure and enterprise. SMEs in the space shouldn’t let themselves be discouraged by the challenge of securing funding. Instead, they should extend that ground-breaking spirit to their finances, take advantage of the opportunities that P2P offers and make their own destiny.

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