Can European SMEs Secure Funding without Investment from Banks?

In short, yes. And more easily than ever in history.

The Peer to Peer (P2P) lending and Crowdfunding explosion through European platforms like Kickstarter, Zopa, Funding Circle and Auxmoney is making it quicker and simpler for SME’s to get funding than it ever was via the big banks – directly from thousands of individuals around Europe and the world.

No SME today should ignore thesefast and fluid sources of financing. It’s fast access to money without the banks!

The Peer to Peer Lending Boom

In fact, P2P is growing so fast it’s becoming an asset class in its own right, frequently earning 10% returns for investors according to this Forbes article. And ironically, with all the potential money to be made the big banks are beginning to take serious interest in the lending system which was designed to bypass them.

For example, Spanish banking giant Santander has a deal to buy up 25% of Lending Club’s loans, according to the NYT. And this trend of banks getting involved isfantastic for European SMEs because it will give you easier access to bank funding through the quicker, less stringent route of P2P Lending.

Crowdfunding Fun

Crowdfunding through services like Kickstarter raised a staggering $5.11 billion last year and is estimated to grow by 94% by the end of 2014. The huge potential of crowdfunding for SMEs was made famous by the Facebook acquisition of Oculus VR – a crowded funded virtual reality company – last year for $2 billion.

Both P2P Lending and Crowdfunding have caught up the public imagination, giving a slight ‘stick it to the man’ feel as they allow investors to invest directly in their fellow citizens, cutting out the banks.

So if you’re a European SME, how can you take advantage of these alternative banking sources to raise cash?

Why Most SMEs will Prefer P2P Lending

As powerful as the overall crowdfunding trend is, most SMEs will find it far easier and more reliable to get investment through P2P lending in particular.

Non-loan crowdfunding is basically for SMEs with bright, exciting new ideas to get financing from individuals around Europe and the world to fund their new project. Standard crowdfunding doesn’t give the investor any return, except the satisfaction of helping and some bonuses like getting one of the first products.

But because it’s not a real investment, like P2P lending, it takes projects which really grip the imagination to get funding. Something new, special and exciting, like Oculus VR. Most SMEs may have just as profitable business propositions – perhaps a proven and well-known business model – but without the same glamour. Andthey’ll find it harder and slower to raise cash through something like Kickstarter.

Equity crowdfunding now allows investors a piece of your business for their money. So if you’re happy to give up equity, this could be a great option. But if you’re looking for a loan, there’s a far better route.

What Exactly is Peer to Peer Lending, and How Can You Use It?

P2P lending is also known as social lending.

You’ve probably technically done P2P lending before, if you ever loaned money to a friend without going through a bank. That’s P2P lending! Of course, the difference the internet makes is both the lender and SME borrower can have no relationship at all and still have a very secure and safe transaction.

Typically, if you’re an SME seeking funding, you’ll apply through one of the services listed below, filling out credit forms and your application. Then the service will tell you how large a loan you can apply for and what interest rate you’ll be paying.

On the other side, investors will be allowed to loan to your business, and typically it won’t be one or two investors meeting your loan. But hundreds investing small amounts that add up. One of the most attractive things for P2P investors is how easy it is to diversify and spread risk.

How the Internet Makes Alternative Financing Easy

There are powerful trends of the market making it easier and easier to get P2P loans month by month. Competition is so high between platforms, pushing for greater improvements all the time. These days, anyone can set up a P2P lending platform provided he has a background experience with well thought plan subject to regulatory authorisation utilising with easy-to-use banking-like lending suites like the Peer-to-Peer Lending Software and offer greater benefits to lenders and SMEs alike – tapping directly into the huge demands to borrow and invest. The benefit of actually using an established system, rather than a simple website or a counter-p2p platform is the reliability of monitoring risk elements, being white-labelled and able to perform complicated calculations as it can be customised and was built for this exact purpose.

And individual investors are also so excited about the prospect of investing directly into companies, the trend is only going to keep on growing. SMEs should get on board.And here are the five best places to do so in European today;

  1. Funding Circle (UK)

This fast-growing UK platform has loaned over £90 million to SMEs over the last 4 years. Even the UK government, eager to spur on small business owners, is lending through Funding Circle, promising a total of £20 million and doubtless more thereafter.

Investors are flooding to it, and loans can be anything from £5,000 to £1 million.

  1. Zopa (UK)

The top European P2P Lending platforms are mostly UK-based, so far. Like Zopa, a more personal service with individual lenders and borrowers interacting directly. And borrowers are neatly categorized into credit grades for easy sorting.

Loans only go up to £15,000, but the process is fluid and it’s perfect for small business owners with decent credit and in need of a quick cash injection. You can always get more than one Zopa loan if you need more cash.

  1. Auxmoney(Germany)

This booming German P2P platform has seen €43 million raised over 10,000 projects through it so far, and at a quickly accelerating rate, recently seeing €12 million raised in a single month. The German market is getting on board P2P lending with gusto.

Loans range from €1,000 to €20,000. So again, a good SME source for smaller cash injections.

  1. Ratesetter (UK)

Ratesetter introduced the concept of borrowers paying a credit fee to lenders if they miss payments or defaults. Most P2P lending platforms offer the lender no reimbursement if a business defaults, so this adds an element of risk for an SME, but the favourable interest rates often reflect this. Judge this one carefully.

  1. isePankur (all of Europe)

This platform was the first to allow cross-border lending throughout the EU, and is now looking at expanding into Central and Eastern Europe too. Great for SMEs looking for foreign investment, and a much larger pool of money to attract.

Elsewhere in Europe, the top P2P lending platform in France is Pretd’Union. In Italy, it’s Smartika. And in Spain, it’s Comunitae. All growing fast as great sources for SME-financing.

The Future of P2P and Alternative Finance

As governments, pension funds, hedge funds and other institutional investors join the big banks in getting a piece of the P2P Lending pie, it’s clear that we’re only at the very beginning of this trend for SME funding.

In a way it’s a beautiful joining of banks alongside individuals on an equal footing – all lending under the same terms. Peer to Peer Lending and Crowdfunding still only account for a tiny sliver of the European business lending market, but they’re growing fast, and all indicators show it won’t stop any time soon.

Who are the biggest beneficiaries of all this? SMEs.The future is bright forsmall and medium-sized business funding!