The economy may be continuing its long haul back from the dark days of the 2009 financial crash but all the available evidence suggests that SMEs are still being starved of finance by the banks that is fuelling the growth of alternative finance.

Despite an uptick in net lending to smaller firms by banks in the first three months of 2015, demand for credit continues to far outstrip supply.

According to a report published late last year by the the Federation of Small Business, 52 per cent of SMEs find the availability of bank finance either poor or very poor with half of those who responded to the survey describing bank loans as ‘unaffordable’.

Little wonder then that many SMEs are increasingly turning to alternative finance.

Nesta’s 2014 report ‘Understanding Alternative Finance’ showed that between 2012 and 2014, the amount of finance received by SMEs from alternative funding sources rose from £267 million to £1.74 billion – an increase of 600 per cent in the growth of alternative finance for small business. 

At the same time, the number of SMEs using bank loans, overdrafts and credit cards fell by 20 per cent, according to research by SME Finance Monitor.

But a lot of firms remain unclear over what alternative methods to fund investment or expansion are available. Nesta’s 2014 report revealed that more than half – 56 per cent – of SMEs declared they were not familiar with the alternatives to traditional bank lending.

Take advantage of the growth of alternative finance.

The choice for firms looking for extra funding or investment has never been greater. To clarify what is an increasingly complex area, Merchant Money has put together the Ultimate Guide for SMEs on Alternative Finance.

It explains, among other approaches:

• Peer to peer lending – SMEs are able to borrow directly from other organisations and individuals. Interest rates have improved dramatically in recent years and now compare very favourably with those offered by banks.

• Crowdfunding – Crowd funding continues to grow in importance. A raft of new sites like Crowdcube and Seedrs are driving this growth, selling shares for as little as £10 per investor.

• Pension-led funding – The liberalisation of rules around pensions has seen a growth in the number of investors looking to loan parts of their retirement pots to small businesses at favourable rates.

• Asset-based lending – A large number of financial service companies offer this form of finance where loans are secured against a firm’s assets – usually accounts receivable or inventory – releasing money now in return for payments against future growth.

• Self-issued retail bonds – A small but growing area in the UK, retail bonds present a lower risk to investors than equity. They promise an annual payment and the paying back of the capital at the end of a bond’s term.

• Community Development Financial Institutions (CDFI) – Another developing market in Britain, CDFI finance is primarily targeted at SMEs operating in less well-off communities where access to bank finance may be particularly challenging.

• Grants, business angels, private equity, venture capital etc – They may have been around for decades, but these more established means of funding and help continue to grow in importance as bank lending flatlines.