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Growth in alternative forms of financing for SMEs

June 19, 2020

A large part of SMEs is still financed by bank financing. Alternative forms of financing are increasing every year in the Netherlands. SMEs are increasingly opting for financing outside the bank. For example, the growth in non-bank financing was 26% in 2019. 22% of SMEs now choose to finance their activities in a non-bank manner. It can be concluded that non-bank financing has passed the experimental phase. After all, forms of non-bank financing now occupy a serious place in the financing market for SMEs.

Well-known non-bank forms of financing

You probably know a few ways to get money for your SME without going through the bank. Well-known ways are crowdfunding, leasing and factoring . The non-bank financing forms of lease and factoring have been increasing in size since 2014. In 2019, research shows lease and factoring accounted for 74% of non-bank financing.

2019: increase in non-bank financing in figures

Compared to 2018, non-bank financing grew by 26% in 2019. The amount of new dispensations in that year is USD 2.7 billion. This amount is used to finance the activities of one in five of the SMEs. For loans of less than 1 million, 22% of the investments are financed non-bank. Certainly for smaller loans, non-bank financing apparently meets a need in the financing market. During the corona crisis, this need will most likely increase further. What happens if loans smaller than 1 million are increasingly funded non-bank? By 2023, the banks will no longer be the largest lender of SMEs. That role has then been taken over by the non-bank financiers.

Non-bank financing for starting entrepreneurs

Imagine you decide to start a business. You still have to prove yourself. The lack of a track record can be a reason for a bank not to provide financing. No family or friends willing to lend you money? No high net worth individuals willing to lend you money? Then there are different ways of non-bank financing:

- Perhaps you can appeal to the Business Angels . These are investors you don't know personally. Nevertheless, these investors are willing to invest in the start or further growth of your company. They ask for something in return. They invest in your business in exchange for a subordinated loan , shares or a combination of subordinated loan and shares. Business Angels such as Matching-Capital, Vectrix-NextStage and The Investors Club are typically willing to invest amounts of between USD 50,000 and USD 750,000 in a new venture.

- Doesn't a Business Angel want to join your company? Then you can opt for the non-bank financing form of microcredit. Do you need a microcredit of up to 250,000 USD and you cannot get a Credit the regular way? Then contact Qredits. This is the microcredit provider for starting and existing SMEs. In 2018, this lender provided loans for an amount of approximately USD 70 million. Compared to the amount provided in 2017, this represents a growth of 42%.

- Suppose you are a starting entrepreneur with an innovative and fast-growing company, such as an ICT company. Then you may be able to look for venture capital, also called venture capital . The 2008 crisis resulted in a sharp decline in the amount of venture capital provided. From 2017, the share of venture capital as a form of non-bank financing will increase again markedly. In 2018, an amount of 400 million in venture capital was invested. Of this amount, 44 million was intended for Seeds. These are companies that are in the preliminary phase of the start-up phase. An amount of USD 302 million was invested in start-up companies. An amount of USD 54 million was intended for companies that had already grown out of the start-up phase.

Non-bank forms of financing for start-ups and growing companies

Is your company growing? It is probably possible to get a bank loan. However, you can also opt for non-bank financing. Forms of alternative financing that are also suitable for growing companies are factoring, leasing, crowdfunding and the credit union.

- Factoring and leasing are suitable for every stage of the company's life. Beginning entrepreneurs can therefore also use it. Would you like to take advantage of one of these types of asset-based financing? Then your assets, such as machines or debtors, play an important role. Factoring and leasing will increase in size from 2014.

- You want to start a business. Then you can consider collecting money from the crowd. These are individual investors. With this form of non-bank financing you can determine the interest yourself. This fast-growing form of financing can also be used by starting, growing and mature SMEs. Well-known investment platforms are Perfect Funding, Sustainable Investing and Collin Crowdfund. These three platforms each account for loans to entrepreneurs in the amount of USD 40-45 million annually. Start-ups can turn to Perfect Funding for loans between USD 10,000 and USD 250,000. Collin Crowdfund focuses on medium-sized businesses with a capital requirement of between USD 50,000 and USD 2.5 million.

- What is a credit union ? A cooperative of SME entrepreneurs. The cooperative makes loans available to each other through a communal cashier. Typically, credit unions specialize in a particular sector and region.

Non-bank forms of financing for mature SMEs

You have a mature SME. In that case too, forms of alternative financing are possible.

- Private equity funds invest exclusively in mature companies. This always concerns non-listed companies. A well-known form of private equity is growth capital. This form of private equity is intended to help companies grow.

- You are an SME entrepreneur. Then you can raise financing via the capital market. An SME entrepreneur can offer his securities on various platforms. Another possibility are the funds that exist for SMEs. For example, the SME fund issues bonds. The proceeds are then invested in mature SMEs.

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