Business First Summer 2017 Business First Magazine Summer 2017 | Page 42

ULSTER UNIVERSITY BUSINESS SCHOOL
SME FINANCE: WHAT’S THE ALTERNATIVE?
cash ISAs and this return has been further
enhanced by the introduction of Innovative
Finance ISAs from March 2016, permitting
the return to be held within a tax­free
wrapper.
However with additional returns comes
additional risk and the Innovative Finance
ISAs do not currently enjoy protection under
the Financial Services Compensation Scheme
(FSCS).
Crowdfunding
Crowdfunding has arguably developed
more from an explosion in social media and
the sharing economy than from any perceived
inefficiencies in the capital markets.
The predominant type is equity­based
though the fastest growing categories are
reward­based and donation­based
crowdfunding where the motives for
investing are more altruistic in nature.
Otherwise the crowdfunding market operates
similarly to the P2P market through the
medium of platforms with Crowdcube (48 per
cent market share) being the dominant player
followed by SyndicateRoom, Seedrs and
VentureFounders.
There are also tax incentives for investing
in the equity­based crowdfunds in the form of
eligibility for the Enterprise Investment
Scheme (EIS) or Seed Enterprise Investment
Scheme (SEIS).
Case Study
See.Sense was founded by Philip and Irene
McAleese. Its first product was Icon, a
connected bicycle light that uses advanced
sensors and connectivity technology to
improve cyclist’s visibility, react to higher
risk situations and integrate with
smartphones to provide theft and crash
detection alerts.
Established in 2013, backed by VC
(TechStartNI), it has almost doubled revenue
every year, has won several major awards,
and has distribution deals in several
countries.
SeeSense has accessed crowdfunding on
three occasions, two earlier rounds with
Kickstart raised £114,000 from 1,400
investors and more recently raising £711,000
against a target of £500,000 from 479
investors on Crowdcube.
Other notable local crowdfunders include
Schnuugle, Skunkworks, Boundary Brewing
and Hurree.
Asset­Based Finance
Businesses are increasingly being affected
by lengthy waits for payment over and above
the standard 30 days. This problem is more
acute for smaller businesses; businesses with
a turnover of less than £1million now wait an
40 www.businessfirstonline.co.uk
average 72 days for payment.
This is 11 days longer than at the peak of
the recession. Asset based finance is a key
way for businesses to manage the challenges
of late payment. Finance is available from
banks and specialist finance businesses, such
as Upstream Finance, that can provide
sustainable working capital, protection
against bad debt, late payments and bring a
range of other business benefits to your
clients.
InvestNI Funds
A suite of funds has been created by
InvestNI to assist SMEs with high growth
potential. These include:
(1) Growth Loan Fund: £50m fund that
provides unsecured loan (mezzanine)
finance to SMEs that can demonstrate
strong growth and export potential. The
fund is operated by Whiterock Capital.
(2) Development Funds (ERDF): Two
£30m equity funds designed to help SMEs
in Northern Ireland accelerate their growth
operated by Crescent Capital and Kernel
Capital.
(3) Techstart NI (ERDF): £29m integrated
suite of funds and support for
entrepreneurs, seed and early stage SMEs
and university spin­outs.
Growth of alternative finance
The growth of alternative finance has been
exponential in recent years with P2P lending
increasing by 288 per cent from 2013­2014,
99 per cent from 2014­15 and 70 per cent in
2015­16.
The growth in crowdfunding has been more
dramatic albeit from a much lower base. It has
been estimated that P2P lending now accounts
for about 3.3 per cent of all UK business loans
and equity crowdfunding for over 15 per cent of
UK seed and venture stage equity.
What are the risks?
Basic finance theory concludes that
increased risk follows from potentially
increased returns and a number of risks are
associated with the alternative finance
market:
(1) The collapse of a platform is viewed as
the primary risk in the market which is
exacerbated by both the P2P and
crowdfunding markets being dominated by
a small number of large platforms.
(2) The attractiveness of the P2P market
could be significantly influenced by an
increase in default rates.
(3) The attractiveness of the crowdfunding
market would be diminished by the
removal of associated tax incentives (EIS,
SEIS).
(4) An increase in regulation imposed by
the Financial Conduct Authority (FCA).
(5) Institutional investors “crowding out”
retail investors.
REFERENCES
Cambridge Centre for Alternative Finance
Research (www.jbs.cam.ac.uk/faculty­
research/centres/alternative­finance/)
Crowdfunding Index Beauhurst
(about.beauhurst.com/blog/crowdfunding­
index­q1­2017)