The funding gap: why tech SMEs need alternative finance

tech sme

There has been a resurgence of tech IPOs in 2017, validating the potential of high-growth companies operating in this sector.

The UK needs to remain a leader in this field post-Brexit by supporting its home-grown tech scene.

UK tech start-ups are receiving a lot of attention in the press. They’re something we’re rightly proud of – the UK is a centre of innovation. Tech 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.

But there are a lot of tech companies in the mid-market who find it much harder to get access to the finance they need. Once a business graduates from sexy start-up full of promise and astronomical growth models into a steady going concern, 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 and the start-up scene

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.

Nervous banks

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 change direction quickly 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?

Go alternative

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 just need a few hundred thousand now, and a few hundred thousand 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 accounts receivable, businesses with a steady income stream can avoid having to put up their assets or personal property as security.

Mid-market SMEs are the heart of British business, pushing forward innovation and enterprise. It’s essential that they can find the funding they need. At a time when institutional purse strings remain tightly pulled, P2P lending offers these companies a simple and secure way to finance their growth.

Tech companies must not be discouraged by the funding challenge – instead, they should be bold, go alternative and make their own destiny rather than waiting for the banks to hand it to them.

Angus Dent, CEO, ArchOver