The last 10 years has seen a sharp transformation of funding opportunities for small and medium-sized enterprises (SME’s).  A risk-tolerant market environment where financial leverage expanded borrowing opportunities has been replaced by a risk-adverse landscape with regulatory constraints and reduced lending appetite from traditional funding sources.  SME’s have been disproportionately affected.

The fall-out from the financial crisis, though, also created new funding opportunities— partly out of necessity and partly out of technology.  It created strong demand for alternatives to replace or complement traditional sources of funding while the boom in crowdfunding led to the emergence of online-financing platforms.  Their key innovation is the ability to funnel funding from a diverse crowd of small and incremental investors to relatively small and discrete businesses in a cost-effective manner.

For SME’s, this is like manna from heaven because they have a competitive advantage to raise small amounts of capital compared to larger companies.  Incremental funding is proportionately more significant while they can offer higher rates of returns to investors.

Online financing platforms have also evolved to cover a range of funding needs.  Equity crowdfunding typically raises capital for start-ups but also for established companies prepared to sell equity; peer-2-peer lending offers long-term finance; while market-invoice lending can fund working capital needs.

As these platforms grow further, traditional lenders will ultimately respond too by differentiating their products further or by competing directly.  Either way, SME’s win because they will have more choice.  However, their challenge will remain to find the right product from the right lender.