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Alternatives to traditional bank funding emerge as attractive options for SMEs

Alternative funding is gaining support among small businesses in the construction industry in place of traditional bank finance.

Small and medium-sized businesses in the construction sector, which make up approximately a fifth of all of Britain’s five million small businessesare among those most willingly exploring new, alternative forms of funding.

SMEs in the industry, particularly those in the renewables area, are embracing invoice trading, peer-to-peer lending and even crowd funding as bank lending continues to be squeezed.

Alternative funding gaining importance

This comes just three weeks after the most recent Markit/CIPS Construction Purchasing Managers’ Index rose to 57.0 in July from 51.0 in June, with construction firms reporting greater expansion than anything seen over the previous three years.

“For longer-term investment, peer-to-peer lending and crowd funding are really taking off”

This is important because there are few areas more important to the long-term growth of the UK economy than small businesses and construction.

The fact that so many businesses in the construction sector are SMEs makes it doubly significant.

The challenge for all businesses, regardless of profitability, value and potential, is to maintain a good level of liquidity to meet immediate costs and contribute to growth.

Without liquidity they will fail. The encouraging sign is that alternatives to traditional bank financing are now available.  

What are the alternatives?

We are seeing the development of companies such as Platform Black, which bring a new approach to invoice financing by facilitating online platforms where companies seeking immediate cash against valid invoices attract bidders in an auction.

This is much cheaper than traditional bank factoring, has lower barriers to entry and the small business remains in control of the invoices they want to auction and the price they pay for the service.

“If SMEs are supported and encouraged to grow, the construction industry and the country will benefit”

Crowd funding has been much lauded for its potential to raise money for small businesses.

In December 2012 a report by innovation charity Nesta, Crowding In, estimated that crowd funding could raise £4.7bn a year for UK businesses by 2016. But this sector has to mature further and faster.

Freeing up investment and expansion

The UK’s five million SMEs are vital to the economy: they are at the heart of economic growth, providing 60 per cent of private sector jobs and half of private sector turnover.

But despite 67 per cent of SMEs saying they are looking to grow within two to three years, just 20 per cent expand their workforce each year, mostly because of constraints on funding and investment.

These examples of new approaches to funding can help bring SMEs in all sectors, including construction, the financing they urgently need on fair terms.

If SMEs are supported and encouraged to grow, the construction industry and the country will benefit.

Howard Robinson is communications manager at Ingenious Britain

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