Alternative finance for small businesses: How to access the financial support you need

Ireland’s funding landscape is changing, with alternative finance providers now having a significant foothold.

This change has been partly precipitated by the downsizing of the banking sector.

Over the past decade, Rabobank, Danske Bank and Bank of Scotland have exited and earlier in 2021, it was announced that Ulster Bank and KBC Bank are also ceasing operations in Ireland.

With the exit of the banks, other non-bank providers have entered the melee and now have a significant role in financing Irish business, including small and medium-sized enterprises (SMEs).

Recent Central Bank data shows that Irish SMEs borrowed almost €4bn from non-bank lenders between 2019 and 2020. The equivalent figure for banks is €10bn.

So what does this mean for your business?

Essentially, if you’re unable to get business finance from a mainstream bank, or want to turn to a different method of financing your company requirements, there are numerous options open to you.

In this article, we feature a range of alternative finance options that you can consider accessing.

Here’s what we cover:

What is alternative finance?

Equity financing vs debt financing

Equity financing

Debt financing

Final thoughts: Do your research before looking to access funding

What is alternative finance?

It’s basically any type of business finance that doesn’t come from a mainstream bank and covers a broad range of finance options such as:

• Venture capital
• Angel investing
• Crowdfunding
• Trade financing.

Such providers often use technology such as artificial intelligence and machine learning to gather data and onboard customers quickly.

These new providers of financing offer welcome competition, though they come with pluses and minuses.

“Alternative finance often attracts a higher cost of funding than a high street bank,” says Hazel Cryan, head of debt advisory at KPMG. “However, this is often outweighed by swift access to flexible funding solutions.

“Speed of access to funds and a responsive supportive finance provider is often cited as one of the main advantages.”

Claire Carroll is a senior investment adviser at Enterprise Ireland and has a bird’s-eye view of the struggles that business have in accessing finance, specially smaller businesses.

She says SMEs need to be aware of the expanded menu of alternative finance options available to them.

Carroll adds: “There is no one solution that solves everything. This is the challenge we have and it really is hard work for a business owner to try and get a grasp on the whole ecosystem.”

Equity financing vs debt financing

Broadly speaking, funding falls into two categories – equity and debt financing:

• Equity financing involves giving up a portion of ownership of your company, but doesn’t need to be repaid.
• Debt financing doesn’t require giving up a portion of ownership but needs to be paid back.

Below, we go into more detail into what these options look like.

Equity financing

Instruments such as angel investment, venture capital and crowdfunding all fall under the equity financing heading.

Angel investment

Angel investors typically fund promising, early stage startups, in exchange for a share of the business, usually in the form of equity.

Many angel investors are experienced business people who have successfully started their own companies in the past and may be in a position to provide a mentoring role, as well as funding.

The most well-known in Ireland is HBAN (Halo Business Angel Network). HBAN receives government funding and actively works to increase the number of angel investors involved in investing in early stage companies.

It also identifies, screens and prepares young companies that are looking to raise seed investment to connect with the angels.

There are also niche angel investors.

AwakenHub, for instance, is targeted at female entrepreneurs. It was recently set up on the back of startling statistics such as that women-led startups receive only 2% of venture capital funding and also only about 5% of venture capital investors are women.

Venture capital

Some companies that receive angel funding may go on to receive venture capital.

A company looking for venture capital will already have proved its potential and is now ready to commercialise its innovation.

Venture capitalists are typically very large institutions such as pension funds and financial firms, with the investment usually in the millions of euros rather than thousands.

Only a very small cohort of companies can access venture capital. “These are high growth, high potential businesses, typically in the technology, life science or medical device space. These are companies that can scale, have global demand and are truly disruptive,” explains Carroll.

Venture capitalists require a high rate of return and often obtain substantial ownership of the company.

The ultimate goal is often to sell the company to a bigger one or to position the business for an initial public offering (IPO).

A company applying for venture capital funding would have to able to provide significant detail about the management team, the business model, the market opportunity, the company’s financials and how the investment money will be used, and how investors will get a return.

Also, other factors may need to be considered. For example, if the business relies on new technology or a new and improved process, then it would need to file for a patent.

Crowdfunding

At the other end of the equity funding spectrum is crowdfunding, which involves a large number of individuals investing a small amount of capital to finance a business.

Crowdfunding is still underdeveloped in Ireland as a funding instrument and is unregulated both in Ireland and the European Union (EU), though there are plans to regulate.

An example of such a company in Ireland is Spark. Many of the companies profiled on it would be Revenue-approved Employment Investment Incentive (EII) companies.

EII is a tax relief that aims to encourage individuals to provide equity-based finance, with investors able to qualify for a tax refund of 40% of the amount of their investment.

Debt financing

Debt financing is much more common than equity financing.

This is the area in particular where alternative funding providers have gained a foothold.

It’s especially in the area of asset-backed financing, where your company can access funding based on the value of specific assets such as trade account receivables, inventory, machinery, equipment or property.

Also, for such funding, a personal guarantee is not generally required.

The most common types of asset-based debt financing include:

• Accounts receivable financing. This uses receivables as collateral for a loan. As the business collects the receivables, the proceeds are used to repay the loan.
• Inventory financing: It’s an asset-backed business loan that uses the inventory you intend to buy as collateral.
• Factoring: This is a process whereby accounts receivables are actually sold to a third party (the factor) for a discount price, after which the third party takes on the job of collecting the receivables.

Online peer-to-peer lending platforms such as Flender, GRID Finance, InvoiceFair and Linked Finance operate in this space.

Other non-bank lenders in this space include commercial finance companies such as Close Brother, Capitalflow and Finance Ireland.

The government has also had a part in encouraging the growth of non-bank debt financing. The Strategic Investment Fund, which is managed and controlled by the National Treasury Management Agency, has actively encouraged direct lenders to set up in Ireland.

Also, at the SME level, the Strategic Banking Corporation of Ireland (SBCI) funds loan products at below market interest rates.

These products are distributed via SBCI partner lenders and in a significant move, in 2021, SBCI partnered with non-bank lenders for the first time.

Linked Finance was one of the non-banks lenders that recently partnered with the SBCI.

As its head of marketing, Niamh Finn, points out, since 2013, Linked Finance has supported more than 2,800 SMEs, including beauty salons, service stations, medical supply companies, cafés, restaurants and everything in between.

She adds: “At Linked Finance, speed in making decisions and a simple application process define our business ethos. Our customers get access to funds in a time frame that works for their business needs.

“Using Linked Finance, businesses get a decision within 24 hours of submitting their application.

“Rather than a ‘slow no’ that companies see so often with pillar banks, we understand that SMEs need access to fast and flexible finance options. A quick decision and a quick drawdown give Irish SMEs the confidence and ability to invest in their business future.”

While these new finance providers have increased competition and choice, the banks, of course, also continue to play a very big role and continue to be the main providers of senior unsecured debt.

Final thoughts: Do your research before looking to access funding

The complexities of financing can be overwhelming, particularly for a small business that may not have the expertise.

KPMG’s Cryan emphasises that you must put in the groundwork before looking to access funding.

She says: “I would recommend business owners and finance directors fully evaluate their liquidity requirements across a range of scenarios and stress cases.

“This exercise will give clarity to the appropriate mix of debt or equity required and assist in defining the funding ask. When engaging with banks or alternative finance providers, it is important to have a clear use for the funds and expected forecasted cash flows to demonstrate repayment capacity.

“I would recommend speaking with your accountant or financial adviser to assess the type of funding required and which finance providers would be most appropriate.

“Also, although it can be time consuming, it is advisable to speak to more than one finance provider to ensure the best possible outcome.”

Lastly, if you need funding advice for your company, your Local Enterprise Office is always a good starting point. It has a very good online tool that directs you to the appropriate supports for your particular business.