Which alternative finance solution best fits your business?

It is estimated that more than 95% of businesses across the world are small and medium-sized enterprises (SMEs), accounting for approximately 60% of private sector employment and, on average, 52% of a country’s private sector contribution to GDP.  

Despite their importance to the growth of economies, SMEs face a number of hurdles when seeking finance. Banks, the traditional provider of loans, are increasingly focused on financing larger companies, meaning there is a lack of affordable funding options for the SME market. The International Finance Corporation (IFC) estimates that the current SME funding gap in global emerging markets is more than $2 trillion (approximately $260 billion in MENA).

This considerable funding gap between the demand and supply of capital is driving a critical need for alternative finance solutions to fuel growth in this underserved sector of the economy. Two solutions that are rapidly gaining popularity due to their attractive cost, accessibility, and flexibility, are equity crowdfunding and peer-to-peer (P2P) finance.

While they are both built on the power of the crowd, it is important to understand that there are fundamental differences, which suit different types of companies. To determine which is the most suitable for your business, you need to be clear about what stage it is at, the amount of funding required, what the capital is to be used for, how long you need the finance for and how soon the funding is needed. Making the wrong decision can put your business at risk of legal action, bankruptcy or even takeover by lenders.

Equity crowdfunding involves selling part of your business to investors via a crowdfunding website where your finance request is covered by a number of people who invest small amounts of money in your business, product or idea. The added benefit of this is that experienced investors can also bring new skills and opportunities to the business. The downside is that you will end up owning a smaller share of your business and in some cases may have to consult your investors before making certain management decisions. This type of finance is generally more suitable for startups as the investors’ share the business risk and you won’t have to pay any interest or repay the funding.

P2P finance is based on similar principals to equity crowdfunding, in that it uses the internet as a platform to reach hundreds or even thousands of potential investors who invest small amounts of money to finance businesses for a specific project in return for monthly interest installments. P2P uses innovative platform technology to connect investors with businesses for a mutually beneficial relationship so that businesses get faster access to lower-cost, debt-based finance and investors get competitive returns with diversified risk. This type of finance is more suitable for established credit-worthy SMEs looking to finance working capital for expansion. P2P originated around $9 billion of loans globally last year, which is expected to grow to $1 trillion in the next ten years.

P2P is already a very successful practice in the UK and US, where Lending Club, the largest player in the industry, exceeded expectations when it raised more than $865 million in its recent IPO. Lending Club, as well as other P2P providers such as On Deck, has grown rapidly by offering loans and savings products at terms more attractive than traditional banks. Meanwhile, in the UK, the British Business Bank, part of the UK Government, has invested over £200 million in P2P platforms to support further financing to small businesses in the UK.

November 2014 witnessed the launch of Beehive, the Middle East’s first P2P finance company. Set to revolutionize the SME finance industry using platform technology, they are offering a marketplace that directly connects established businesses with smart investors. Beehive provides SMEs with faster access to lower-cost finance through flexible loans ranging from AED 100,000 to AED 500,000. These loans run for up to 3 years, with no early repayment penalties.

They are funded by investors on the Beehive platform, who can set up an account with little as AED 1,000, and can invest from as little as AED 100 into each listed business. Investors can diversify their risk across a number of companies operating across diverse sectors, with new companies listing on the platform every week, and can directly invest in businesses that they believe in.

The introduction of P2P to the region is long overdue and comes at a time when SMEs are facing significant hurdles to access capital, and investors are struggling to find a decent return on their portfolios. Driving the next phase of development for the industry is expected to be a greater involvement of institutional investors. This will significantly deepen the pool of liquidity and mean businesses are able to access loans at even better rates, which would in turn generate growth of the wider economy. 

About Craig Moore

Craig Moore is the Founder and CEO of Beehive. He is responsible for overseeing the overall strategic direction and managing the day-to-day operations of Beehive.

Before founding Beehive, Craig was a Founder & COO of Butterfly Software, a data analytics and migration software company acquired by IBM in September 2012. Prior to Butterfly his experience includes various sales, consulting and finance roles at numerous multinational companies such as Dell, EMC, Hitachi and HSBC, with an emphasis on shaping effective go-to-market and value propositions.

 View the Article on Capital Business Here