The role of alternative finance in the growth of SMEs

The Role Of Alternative Finance In The Growth Of SMEs

The role of alternative finance in the growth of SMEs

Small and medium-sized businesses are the financial backbone of the United Kingdom, with over 500,000 new small businesses created each year. Their growth is driven by the ability to seize opportunities as they arise which in turn is facilitated by aspects such as healthy cash flow and good access to finance. By providing greater access to funding, alternative finance is playing a crucial role in the continued growth of UK SMEs.

According to TheCityUK Report, across Europe SMEs account for more than 65 per cent of employment and 55 per cent of turnover and investments. However, since the economic downturn in 2008, their access to finance has proven to be a frequent source of debate.

With a wide range of different, innovative products, and with an equally large number of easy to access delivery mechanisms, the rise of the alternative finance market has been instrumental in their continued success.

The need for an alternative

This increase in alternative finance providers has been facilitated by the political landscape, where there has been a push to reduce dependency on lending being provided by relatively few competitors; the main source of finance to the economy before the 2008 crash was provided by 4 institutions. It has been suggested that alternative finance may increase the resilience of the financial system and the wider economy in the UK and continental Europe by lessening this historic dependence.

The need for SMEs to access fast and flexible financing to facilitate growth, cover working capital gaps exacerbated by late payments, coupled with the Government backing the industry has received has meant that the alternative finance market has seen impressive growth over the past few years.

The growing role of alternative finance

The UK is the leading market in Europe for alternative finance. The University of Cambridge alternative finance report Feb 2016 estimates that £2.2 billion of business finance was raised through online alternative finance platforms in 2015, providing venture, working, growth and expansion capital for around 20,000 SMEs in the United Kingdom. Alternative funding is already helping UK companies stay in business and grow.

Government-backed solutions

This growth has been partly facilitated by the Government. In 2013 it introduced proposals including the Small Business, Enterprise and Employment Bill, requiring the largest UK SME lenders to forward on details of SMEs they reject for finance to a wide range of alternative finance providers (where SMEs give their consent).

Harriett Baldwin, the Economic Secretary to the Treasury, says:

“The government is determined to encourage a competitive banking system that supports growth and creates jobs. The best way to deliver this is to increase competition in the banking sector and remove the barriers to new sources of finance for SMEs.”

A clear sign of the Government endorsing alternative finance providers as engines for growth and financial stability.

Alternative yet robust

One of the most common misconceptions is that alternative finance platforms are targeted solely at small, barely profitable companies unable to obtain funding from traditional sources. This is not the case.

Using technology to speed up credit applications they enable successful, profit-making businesses to respond swiftly to both challenges and opportunities. They should therefore be seen primarily as “technology-enhanced lending businesses”, looking to drive growth and set themselves apart through market efficiency, transparency, credit scoring and customer experience.

Funding SME growth

According to the Q4 2015 SME Finance Monitor compiled by BDRC nearly half (45%) of all SMEs interviewed agreed that they would use external finance to grow and develop their businesses. But what is it about alternative finance that fuels growth?


A combination of cutting-edge technology and automated credit scoring means faster application processing and immediate access to working capital. Businesses looking for funding can often get finance within 48 hrs. This provides the necessary cash flow to help with unexpected hurdles, and the ability to seize growth opportunities as they arise.


Thanks to the efficient processes and online platforms that many alternative finance providers base their businesses around, applications require less paperwork, meaning more time is available for SMEs to concentrate on what matters most: growing their business.


Businesses who require short term funds to finance seasonal peak periods or rapid growth opportunities need flexible solutions. Choosing the right alternative finance provider means that as long as repayments are within the terms agreed, the flexibility is there to suit the business’ needs.

This flexibility extends to credit terms, non-usage and early repayments. Those providers who do not charge for non-usage or penalise for early repayment are specifically geared to help SMEs maximise growth opportunities, with credit being available precisely when needed.

Transparency and awareness

With business models based around simplicity and clarity, alternative finance providers are transparent about fees, terms and eligibility, meaning better business awareness for owners, better control of day-to-day running costs, and improved planning and forecasting.

Supply chain optimisation

The improved working capital that a readily-available and flexible credit facility creates allows SMEs to optimise their supply chain for maximum growth. Coming from a position of strength, SMEs with a healthy cash flow can enjoy higher profit margins and EBITDA, though bulk or volume buying, upfront payments meaning reduced costs, strengthened supplier relationships, discounts, seasonal smoothing and optimisation of inventory.

When an SME has the ability to pay its suppliers on time every time, it improves its reputation among key stakeholders, allowing it to secure fruitful partnerships and favourable terms with sought-after suppliers and other businesses.

Bridging export gaps

The ability to tap into a flexible, fast and secure form of funding designed to bridge working capital gaps allows SMEs to grow through exporting without suffering the common problem of cash flow shortage between purchasing and payment. Businesses can expand to international markets and diversify their supplier base to meet international demand, thereby increasing both competitiveness and efficiency.

Reducing risk

Diversifying sources of finance means businesses can spread their funding risk. In the event of a particular provider changing terms or reducing their offering, a business that incorporates alternative finance solutions into their cash flow management strategy can mitigate the concentration of risk.

Alternative finance has grown over the past several years to become a multi-billion pound industry, focused entirely on supporting the growth of small and medium businesses through offering swift, flexible, and accessible finance solutions. It has become an increasingly important channel of financing for entrepreneurs, start-ups and SMEs in the UK, promoting economic growth, creating jobs, generating income, facilitating trade, mitigating risk, and fostering innovation.

Pay4’s unsecured, rolling credit facility is designed to work alongside your traditional finance, creating a solution that is 100% optimised for the growth of your business. With no non-usage fees, a simple yet smart online platform and up to 120 days credit, Pay4 provides the working capital you need to ride the peaks and troughs of seasonal demand and seize growth opportunities as they arise.

The role of alternative finance in the growth of SMEs