The Blog

Let's Create a Brighter 'Funding Future' for SMEs

In a world where bank loans are getting smaller and government initiatives have limitations in terms of their effectiveness in supporting SMEs, crowdsourcing stepped in as the social media answer to the SME funding question.

These days you can barely see a news headline that does not address the urgent need to stimulate small business growth in the UK - and that's a great thing. By recent estimates, SMEs are responsible for nearly half the UK's GDP and up to 60% of UK employment - so arguably supporting their growth is our country's best hope for leaving the recession. While we've seen some promising initiatives coming from the government, such as Start-Up Loans (to support young entrepreneurs) and the Get Mentoring project (to encourage volunteer experts to mentor ambitious businesses); others such as Funding for Lending have unfortunately attracted criticism (most recently by Vince Cable) for having 'failed' SMEs.

In a world where bank loans are getting smaller and government initiatives have limitations in terms of their effectiveness in supporting SMEs, crowdsourcing stepped in as the social media answer to the SME funding question. Suddenly we saw companies seeking support in a range of ways, from collecting donations from masses of individuals for community projects, to giving smaller pools of more serious investors a share in a promising business.

The fact that crowd funding, after its initial 'hype phase' came under intense scrutiny is no surprise. Starting with warnings from the FSA of the associated risks to investors, followed by stories surfacing of the SEC's concerns, exposure to securities violations and failed projects, the question on everyone's lips appeared to be "is it just a fad?", when the question could have been "Where does the future of funding lie?" - my response would be that it doesn't only lie within the crowd. We also need to modernise the way that investors currently invest - while the process has existed for many years, it has barely changed. By modernising the process we not only 'future proof' investing for the 'social media generation', we also open investing up to a wider audience in a responsible fashion.

With this, the alternative funding industry has a duty to ensure that the right checks and balances are in place to guard investors' money; if the industry is to thrive in the longer term. This includes adhering to the rules and regulations, and putting in place measures to protect against fraud and money laundering by screening SMEs seeking funding, as well as those investing. This way, we can inspire the right level of confidence in SMEs in need of investment, and attract those with the best potential to succeed.

The industry also has to be educational, and inform people of the risks and long-term commitment involved with investing in small, unquoted businesses. Whilst the industry is encouraging a number of investors to explore investing for the first time, it also has to encourage investors to diversify their investment portfolios, to protect against the risks. One benefit that alternative funding platforms provide to investors is the opportunity to take advantage of government investment incentives such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) from much lower investment amounts. This means investors can receive up to 78% of their investment back in tax relief, which is a great way to reduce the risks.

One of the first questions we are always asked as an alternative funding platform is whether we ourselves invest in the companies featured on our platform- experienced investors want to see evidence of 'skin in the game' - which is understandable. This is a key ingredient of our model, and we think this is extremely important as it aligns the interests between investors, entrepreneurs and ourselves - we all want long-term success. When platforms are confident in the companies they are working with, investors are more likely to feel the same. Of course investors should always do their own due diligence as well!

As a platform, it is our responsibility to inspire confidence in SME investing by educating investors appropriately and ensuring that they have everything they need to make responsible decisions. After the demise of the banking sector and the loss of trust experienced by the city as a result in the eyes of the general public, could a more mature and assured approach to alternative funding give investors the ability to once again support our ailing economy? I surely hope so.

Derek Uittenbroek is founder and CEO of FundTheGap, an online equity fundraising platform for start-ups and small businesses looking to raise up to £2m of investment.