The British Government this week announced that they are putting £100 million into internet based alternative funding providers. Two of the sites who are bidding for the money are Funding Circle and MarketInvoice. MarketInvoice is an online marketplace for companies to auction off their outstanding invoices in order to raise money. Auctioning invoices is not in itself a new way to raise cash, it is known as factoring and has been around for a while. However the difference with MarketInvoice is that it allows small companies to auction invoices on an adhoc basis rather than entering into an ongoing relationship. Funding Circle meanwhile are a more straight forward peer to peer lending website. They match businesses with investors. The investors can put in as much money as they like and can receive interest rates of over 10% in return. The current proposal is for the government to join in and start funding small businesses online.
The British Government’s support for alternative funding methods follows the passing of the JOBs Act in the US in March which, in part, encouraged investors to get involved in crowd funding. The motive for both the British and American governments to get involved in alternative funding is the ongoing problems many start-ups and SMEs are having in securing adequate funding from the banks and other traditional lenders. In many way s the governments are simply catching up with what has already been happening. We have discussed before the success of crowd funding platforms like KickStarter. The government’s endorsement is simply a recognition that these are now legitimate forms of business funding.
Peer to Peer or Crowd Funding is not going to be the magic bullet to solve all company funding problems though. A number of people have highlighted problems with the model being used by market leader KickStarter while more general worries about the wisdom of investing through Peer to Peer sites have been raised.
For small business and start-ups who want the money there are also issues. The returns on investment expected by peer to peer sites can be much higher than through traditional lending methods. So you might be able to get your money but it is going to cost you a lot more. In addition many of the sites like KickStarter require the funding companies ask for to be related to specific projects with a discernable product, and for specific amounts of money. They cannot, for instance, be used to fund the opening of a new shop. The usability of peer to peer funding for start-ups and SMEs is going to be limited to very specific scenarios. However in a business environment where any kind of funding can be hard to come by crowd and peer to peer funding is certainly an option worth looking at.
Popularity: 1%
