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What’s the alternative? SMEs miss out on new funding options

4th September 2014 Print

New research from Aviva reveals that SMEs may be missing out on new funding options due to a lack of awareness and understanding.

According to the insurer’s latest bi-annual SME Pulse, more than one third (36%) of SMEs - equal to 1.8 million UK businesses - plan to invest in their business during the second half of 2014 but many are unaware of the range of finance options available to them, particularly when it comes to alternative finance.

The survey of 1,500 UK SMEs reveals that one third (33%) of SMEs don’t understand what alternative finance is or know how to take it out. A similar proportion (29%) admit to being altogether unaware of it as a funding option.

Awareness levels are lowest among sole traders, with eight in ten admitting that they didn’t understand or were unaware (84% and 80% respectively).

Just two in ten (19%) SMEs say they have considered using alternative finance as a form of funding; with twice as many (40%) saying they have not considered it as an option because they prefer to deal with their high street bank. Almost three quarters (70%) say that they perceived alternative finance as a riskier option than applying for traditional finance via their bank.

This is despite the benefits of alternative finance reported by many SMEs. Half (51%) of those who have previously applied for alternative finance say that they did so on the basis of better rates and greater flexibility than using a high street bank, and one third (31%) said it was easier to secure alternative finance than getting a loan from the bank.

What types of alternative finance are SMEs applying for? The most popular:

1 A business loan or grant (28%)

2 Peer-to-peer funding (27%)

3 Investment or equity funding (26%)

4 Money transfer (20%)

5 Asset based finance (19%)

6 Family loan/investment (17%)

Despite the increasing profile of alternative financing options such as crowdfunding and peer-to-peer lending, Aviva’s research found that one quarter (25%) feel that there is not enough information available to them about the various funding options. 

Robert Ledger, head of small business at Aviva, says: “High street banks will always be an important port of call for many SMEs – whether they are at the beginning of setting up a new business, or seeking investment to expand an existing one. However, with the rise of alternative finance options and increasing media focus on schemes such as crowdfunding and peer-to-peer lending, it’s important for small businesses to understand that there are a variety of options open to them outside of traditional finance methods, designed to suit differing business needs.

“The first step is to understand what the finance is for. Decide whether it is to achieve growth or working capital, whether the business has security it can put down and whether the business needs investment and advice. Then look at which option best suits the business needs. If you are unsure the government website is a good source of information.”

Confidence And Enthusiasm Runs High

The latest Pulse shows improved levels of confidence among UK SMEs but also highlights a strong collective desire for greater action from the government to help them to grow.

Almost two thirds of the businesses surveyed expect strong or improved growth for the second half of 2014, an increase on figures from six months ago (58% compared to 52% in January 2014).

With this confidence comes more enthusiasm, as SMEs report greater satisfaction than ever from running their business - over half (51%) of SMEs say that they still really enjoy running their own business (compared to 39% who said the same in January 2014).

The findings indicate that SMEs are enjoying an improved economic outlook. Those exhibiting the highest levels of optimism were manufacturers and those in hospitality (restaurants, cafes or pubs), with around three quarters forecasting strong or improved growth (73% and 72% respectively) during the remainder of the year.

London emerged as the location with the highest proportion of confident SMEs (66%).

Ledger continues: “Reports in July that the UK economy has returned to pre-crisis levels must hearten many business owners who may have struggled to survive in recent years.

“It is fantastic to see that half of the SMEs we surveyed are still enjoying running their own businesses and particularly promising that 58% are predicting strong or improved growth for the rest of the year.

“This could be an ideal time for SMEs to revisit their business plans to make sure the business is on track and to identify any new opportunities for growth.”

What SMEs Want Government To Do

Aviva’s Pulse research identifies some mixed feelings from SMEs about the level of support and advice currently available to them from the government. While one third (32%) feel there is sufficient available, more than two in five (43%) disagree and say there is not enough.

What SMEs think the Government should do to help them grow: 2013 – 2014

Cut red tape for tax and accounting for small businesses 33% 49%

Reduce VAT 30% 27%

Reduce corporation tax for small business owners 23% 39%

Ensure more SMEs benefit from employment allowance (reduce National Insurance bills) 11% 18%

Ledger continued: “Our survey shows a significant proportion of SMEs think government should do more to focus on the needs of small business and provide more advice and support.

“Indeed there have been some positive steps, with government reducing the main rate of corporation tax to 23% last year and a further cut promised next year, creating the British Business Bank in 2012 to help secure finance and launching the website Great Business last year, which offers tips and advice.

“It would seem from our survey that some SMEs may not be feeling the benefits of these changes and initiatives yet so clearly there is more government can be doing to raise awareness of the support that is available.”