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Crowdfunding 101: How UK Businesses Can Use Crowdfunding As A Viable Alternative Finance Option

Over the last decade, many new types of alternative finance have emerged in the UK market. Some of these have built upon the traditional methods of funding a business, while others have quite successfully disrupted the market to a certain degree.

Crowdfunding belongs to the latter category.

Getting a group of individual investors to pitch in together to fund a business isn’t something new, but crowdfunding, with the help of available technology, has made it possible for thousands of people to back a product, a service or even just an idea in their personal capacity.

What Is Crowdfunding?

Crowdfunding is exactly what it says it is.

Up and coming businesses (especially the ones that find it tough to raise finance via traditional channels) share their ideas, business plans, product prototypes and everything else that is relevant on a crowdfunding platform and individual investors decide if or how much they want to contribute.

The investors, in return, can get equity in the business, dividend from the revenue or royalty from each sale made, depending on the terms of contract.

It sounds quite simple, because it is. The only decisive factor here is the merit of the idea being pitched.

The UK Crowdfunding Market

Crowdfunding, as we noted earlier, is exciting for both businesses and investors. However, these are still early years, and it would be unfair to compare crowdfunding with other finance/investment avenues such as business loans or commercial finance.

It is estimated that from its inception in 2011 to 2018, crowdfunding has contributed over £600mn to UK businesses.

Is Crowdfunding The Right Choice For Your Business?

Not all businesses are built the same. Crowdfunding can, however, be extremely helpful in getting your business off the ground. Many young businesses and start-ups use crowdfunding just to get through the proof of concept phase (building a prototype, sending products out for testing, acquiring relevant licences and clearances, and so forth).

Crowdfunding may be the right choice for your business if:

  • You only need small capital, but you need it fast,
  • Your products/ideas are relatable and solve real life problems,
  • You can’t raise money via other, more private finance options like personal loans, overdrafts and lines of credit.

Types Of Crowdfunding

Most crowdfunding pitches belong to one of the following types:

Equity Based Crowdfunding (Investment Crowdfunding)

This is, by far, the most important type of crowdfunding.

As a business owner, you ask for and receive funding from investors who, in return, receive a proportionate stake in your business (in the form of equity).

Equity based crowdfunding is ideal for businesses looking to raise a significant sum of money upfront. This is very similar to syndicated angel finance (please read through our guide to angel finance to learn more).

Equity Crowdfunding And Tax Reliefs

Equity based investments in qualifying businesses are eligible to receive tax reliefs (as applicable) under the EIS and SEIS.

Credit Based Crowdfunding

Credit/loan-based crowdfunding is nothing but peer-to-peer finance (P2P finance).

Contributors here act as private lenders who lend you money upfront via the crowdfunding platform you choose. You are then required to repay the crowdfunding platform at a pre-set interest rate.

This is a good alternative finance option for businesses that don’t want to part with equity.

Reward Based Crowdfunding

Reward based crowdfunding allows you – as the borrowing business – to reward contributors in a variety of ways. The most common reward is early access to your products/services.

Donations/Charity Based Crowdfunding

Not all businesses can afford to pay their contributors back. Social enterprises can raise money in the form of donations/charity and use it to fund their business goals.

How Does Crowdfunding Work?

Crowdfunding platforms play an important role here.

There are dozens of crowdfunding platforms presently operational in the UK. Seedrs and Crowdcube are two prominent examples.

Once you know what type of crowdfunding you want to go for, you will need to make public a few important details about your business.

  1. What you’re offering in terms of products/services
  2. How they make a difference
  3. If you have any intellectually protected assets
  4. How much you want to raise
  5. How much you’ve already raised from other means
  6. How you plan on using the funds raised
  7. What the timeline of progress will be
  8. What you’re offering in return

Is Crowdfunding Regulated In The UK?

Most crowdfunding activities in the UK are now regulated by the Financial Conduct Authority.

Loan-based crowdfunding and investment/equity-based crowdfunding are regulated heavily considering the risks involved. The FCA also regulates crowdfunding platforms in line with their policies.

Things To Avoid While Preparing Your Crowdfunding Pitch

As things stand today, there’s no way really for us to tell what percentage of crowdfunding pitches manage to meet their goals. We do, however, have observed a few key trends that seem to be common denominators among campaigns that fail.

Here are the things that you may want to avoid while preparing your crowdfunding pitch:

Confusion And Chaos

This is probably the biggest red flag for any investor. When you prepare your pitch, you need to be as sure as you can about what you’re pitching. Your pitch needs to speak to the investor and answer their questions before they have the chance to even ask them.

Bad Ideas

There’s no way you can sell a bad idea to people and hope to succeed. Paying enough attention to whether the idea is viable, profitable and scalable should be at the centre of your considerations.

Bad Valuation

Many start-ups and young businesses tend to overvalue their ventures. It helps if you bring on board experienced professionals who can evaluate your business for you without any bias. A reasonable evaluation means that potential investors can see how it makes sense to invest.

Crowdfunding Alternatives – Have You Considered These?

Raising money on your own – through personal finance and from your friends/family – is usually the safest bet when dealing with small amounts. However, if you want your business to really take off, you need to take commercial finance more seriously.

There are quite a few commercial finance solutions available in the market that, when utilised properly, can prove to be much more affordable and much less tricky than crowdfunding.

Business Loans

Raise money as and when you need it and use it towards the business expense of your choice – from fulfilling purchase orders to settling existing loans.

Asset Finance

Finance the purchase/lease of expensive equipment through fast, affordable and easy asset finance.

Angel Finance

Bring experienced investors on board and benefit from their expertise and industry connections.

Specialty Loans

Use specialty loans like HMO finance, development finance, bridging loans, BTL mortgages and more to raise money from specialist lenders at low interest rates.

Commercial Finance Network, a leading whole of market broker in the UK, makes it easy for you to match with UK-wide lenders. Every commercial finance application we receive is decided upon within 24 hours – that’s our promise!

To know more or to request a call back, call us on 03303 112 646. You can also fill in this short online form to get started.

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More than half of SMEs unable to fund business ambitions

More than half (52%) of UK SME owners have business ambitions they feel they are unable to fund, alternative finance provider Nucleus Commercial Finance has revealed.

Business owners in the capital are struggling the most to match their ambitions, with over three-fifths (61%) of London SMEs unable to access funds.

Chirag Shah, chief executive, Nucleus Commercial Finance comments: “Although it’s great to see an increase in both profit and revenue for small businesses, it’s clear that funding challenges still remain.

“If business owners cannot access the funds they need to achieve their strategic goals, we could see a significant impact on the UK’s economy if SMEs are held back.

“With SMEs accounting for 99% of all UK businesses, the alternative finance industry has a significant role to play in helping businesses succeed.

“Particularly as high street banks become more reluctant to lend, we need to better educate small businesses on the other solutions out there.

“The alternative finance industry offers a more flexible and personalised approach to lending, meaning they can help business owners who otherwise thought they had no available option.”

Despite SME owners reporting that revenue and profit increased by 10% and 8% over the previous year respectively, businesses are reportedly struggling to achieve their strategic goals.

The biggest goals are increasing brand, marketing or online presence (19%), expanding across the UK (17%), increasing staff (14%) and launching a new product or service (13%).

By Michael Lloyd

Source: Mortgage Introducer

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UK SMEs keen to seek alternative finance in 2019 despite Brexit

More than one-quarter of UK businesses expect revenues to grow by more than 10% in 2019, despite concerns over the potential impact of Brexit.

According to a report from asset-based lender Independent Growth Finance (IGF), their growth ambitions come despite nine out of 10 saying they have concerns about the future of the economy.

IGF’s Powering Freedom Report found that, among British businesses turning over between £1 million and £500 million, 69% of companies expect an increase in revenues in 2019.

To facilitate these ambitions, 71% of businesses are seeking an average of £1.1 million of funding over the next 12 months. This will be used to finance key areas of investment including technology (37%), staff retention (30%) and marketing (27%).

However, traditional lending channels remain slow, with 53% of businesses typically having to wait at least a month for a funding decision in 2018, while nearly one-third have waited three months or more.

As a result, more businesses are considering alternative forms of finance, IGF executives say.

While traditional bank funding remains the top source of finance (67%), the report found that 27% of businesses now use invoice financing and 22% use other asset-based lending facilities.

John Onslow, chief executive officer of IGF, said: “British SMEs are the lifeblood of this country. It is encouraging to hear how many are forecasting meaningful growth in 2019.

“Such a large number of businesses seeking more than £1.1 million in funding shows that businesses want to seize control of their financial futures. Yet our findings suggest many struggle to find quick and flexible funding. With uncertainty on the horizon, SMEs are refusing to stand still. Instead they are pushing for ambitious growth and alternative funding solutions.”

Source: Asset Finance International

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Alternative finance ‘becoming vital’ for SMEs in north

THE ability for small businesses in Northern Ireland to access alternative forms of finance has become a vital factor in their successful growth, the head of a Belfast accountancy firm insists.

Since the financial crash and credit crunch, the funding void left by traditional lenders has been filled by boutique funders and alternative finance, which can allow SMEs to access finance for a variety of different needs, from long term investment through to funding for short term working capital.

But according to Conor Walls, managing director at Exchange Accountants, the key to small firms securing successful alternative financing is to understand what their requirements are and to know what’s on offer, so that they can secure the best possible deal for their business.

With the continuous improvement in technology and the ever-growing popularity of online banking, banks and building societies have continued to close branches across Northern Ireland, and by the end of 2018 over 43 per cent of bank branches available in 2010 will have shut.

“As a result, businesses have had to adjust to the reality that accessing finance from traditional lenders has become much more difficult, and the ability for SMEs to access finance to grow their business is no longer a simple case of hoping the local bank manager likes the ‘cut of your jib’,” Walls says.

“Businesses can access alternative financing through a range of different forms, but most commonly it is secured via friends and family, peer-to-peer lending, angel investors, venture capital investors, crowd funding, equity finance, invoice financing and asset finance.

“Funders will often have key criteria which must be satisfied before any finance is provided, and borrowers can expect to be required to explain in detail what the growth potential of the business is and how the money is going to be used, as well as showing how they will be able to repay the borrowings and what security the borrowers can offer.”

He added: “The financial world is constantly evolving, and it’s no surprise we’ve seen local businesses embrace alternative finance.

“In recent months we’ve found ourselves working with clients to access alternative finance for a variety of needs, from loans in excess of £100,000 for long term investment through to funding for shorter term working capital requirements”, he added.

Funders will often have key criteria which must be satisfied before any finance is provided, and borrowers can expect to be required to explain in detail what the growth potential of the business is and how the money is going to be used, as well as showing how they will be able to repay the borrowings and what security the borrowers can offer.

Securing alternative finance may appear to be a daunting prospect to the uninitiated, but according to Walls the most important step business owners must take is to educate themselves on the pros and cons of each method of funding and ensure they are as prepared as possible.

He added: “Having a real understanding of what’s on offer is crucial to securing successful alternative financing, and I advise every business owner to ask questions and consider their options.

“We spend a lot of time working with our clients to help them secure the funding that suits their business needs. This ranges from identifying their value proposition, preparing profit and loss and cash flow projections to show funding requirements and, more importantly, the ability to repay any borrowings, through to preparing an application and meeting with a funder on their behalf.

“The key to successfully securing alternative financing is to know what your requirements are and to arm yourself with the knowledge to identify the best possible deal for your business,” he added.

Established in 2011 with officers near Belfast City centre, Exchange Accountants provides a range of accountancy services and tax advice to a wide variety of locally based SMEs and individuals.

The company has developed a specialism in digital and cloud accountancy services and was the first accountancy practice in the north to be recognised as a Gold Partner with market-leading cloud accountancy software provider Xero.

Source: Irish News

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One third of business owners unaware of alternative finance options

More than half of SMEs expect to increase income or turnover in 2018-19, according to British Business Bank

One in three British SMEs want to grow their business but are unsure how, according to a new poll by British Business Bank. Often, smaller businesses want to grow but do not consider, or know of, the alternative finance options available to them.

The new polling reveals, for example, that only 5 per cent of businesses have considered angel investment whilst only 7 per cent have considered crowdfunding.

Older business owners are significantly less likely to be aware of or to have used alternative growth finance options than their younger counterparts. One in five (19 per cent) millennials (under-35s), for example, have considered crowdfunding, compared with fewer than one in 20 (3 per cent) over-35s.

The good news is that business confidence is high among those surveyed, with more than half (51 per cent) of business owners saying they expect to increase their income/turnover in the next financial year, with fewer than one in 10 (8 per cent) expecting their income/turnover to decrease.

Piers Linney, non-executive director at British Business Bank, believes that businesses need to look beyond the high street to finance their growth.

Linney said: “Getting investment for your business does not have to be as scary as going into the Dragons’ Den. There are plenty of ways to get finance and access support – the challenge is knowing where to look, making the time to find out about them and getting investor ready.”

Keith Morgan, CEO of British Business Bank, added: “The financial landscape can be complex and confusing for smaller businesses trying to finance their growth ambitions. Our polling shows that too often smaller businesses want to grow but don’t know where to start meaning we miss out on their growth.”

The British Business Ban, the UK government-owned economic development bank, recently launched a Finance Hub – a new website dedicated to providing independent information on finance options for scale-up, high growth and potential high growth businesses.

Source: SME Web

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British SMEs net £15m through alternative finance

Small businesses rejected by high street lenders have been able to source more than £15m through the government-mandated Bank Referral Scheme since the scheme was launched in November 2015.

Figures released this morning (31 August) showed in the last 12 months, 670 businesses raised more than £12m of funding through the scheme, four times the amount raised in the previous year.

Since it was introduced in November 2016, more than £15m has been sourced for businesses across the country and more than 900 British businesses have been matched with alternative lenders, the government said.

The bank referral scheme was created by the Small Business, Enterprise and Employment Act 2015 to allow the UK government to keep an eye on businesses and their requests for business finance.

It allows businesses rejected by a high street lender to have their details referred on to designated finance platforms, which will then seek to help them get a loan from alternative lenders.

John Glen, economic secretary to the Treasury, said: “From breweries to beauticians, more than 900 British businesses have been matched with the funding they need to grow since we introduced our scheme.

“Small businesses are the backbone of Britain, yet many give up on their plans to expand if they can’t get a loan from their bank. Now however, thanks to our match-making scheme, they have another shot.”

Under the scheme, businesses are automatically offered the opportunity to be referred to three online credit brokers, including Alternative Business Funding, Funding Options and Funding Xchange.

Each platform provides businesses the access to a range of lenders and products, including business loans, revolving credit, asset finance and invoice finance.

Over the past year, loans resulting from the scheme ranged from as little as £100 to £1.3m and the average size of a loan secured was £17,285.

But Alan Chan, director and financial planner at IFS Wealth and Pensions, warned businesses should read the fine print of Bank Referral Scheme loans to avoid making a “costly mistake”.

He said: “The scheme is a good idea in principle because banks aren’t the only place to get funding and there are a lot of specialist lenders that are not on the high street.

“As with any loan, it’s important to fully understand the repayment terms and to read the small print. If there’s any doubt as to what they’re getting themselves into, then they should always trust their instincts and get some professional legal advice before they make a costly mistake.”

Alice Hu-Wagner, managing director for strategy, economics and business development at the British Business Bank said: “One of our key objectives at the British Business Bank is to encourage and enable smaller UK businesses to seek the finance best suited to their needs.

“Just over half of smaller businesses consider only one provider when they need funding, however, with over a quarter putting their plans on hold or giving up altogether if they aren’t offered the full amount they were seeking.”

Source: FT Adviser

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65% of UK SMEs expect strong growth as Brexit fears subside

Almost two-thirds of SME owners are forecasting a bright future with 65% anticipating growth of up to 40% over the next two years, according to specialist commercial finance provider Wesleyan Bank’s annual survey of UK small and medium sized businesses.

The ‘SME Heroes or Zeros 2018’ report reveals that 54% are feeling ‘more confident’ about their firm’s prospects one year on and just 11% are ‘concerned’ about the potential impact of Brexit. Despite an uncertain UK economy, the findings highlight a significant shift in defiance from business owners. 50% are adamant that Britain’s exit from the European Union will not dictate their firm’s strategy compared to 28% in 2017.

 Paul Slapa, Head of Direct Sales at Wesleyan Bank, says, “The UK’s economic outlook is often clouded by negativity, but this research highlights that SMEs are performing strongly and have built solid foundations to prosper, both pre and post Brexit. Unless there is a material impact on their business today, there is no reason why SMEs should put on hold their investment plans to sustain and maximise growth.

“By leveraging external financial support from specialist lenders, SMEs can benefit from flexible funding solutions to spread the cost of purchasing new equipment and technologies to gain a faster return on investment.”

Businesses are increasingly exploring alternative finance options rather than relying on traditional borrowing methods such as overdrafts, savings and credit cards to facilitate growth. Almost double (59%) the number of UK SMEs have used external funding on at least one occasion against only 30% in the same survey in 2016 with 27% stating that they now ‘regularly’ turn to external finance, up from 20% two years ago.

Attitudes to finance differ according to age and gender. Business owners aged 45 and above are three times more likely to have ‘never’ sought external funding in contrast to only a fifth of those aged between 18 and 29. In addition, female business owners (28%) are less likely to have utilised external finance than men (40%).

Paul Slapa comments, “With greater access to funding and lower interest rates, more SMEs are considering alternative finance as a growth accelerator and have a wider understanding of how it can benefit their business. Business owners should talk to their day-to-day bank but also compare which providers can support their firm at every stage of its lifecycle, with a range of tailored finance solutions.”

Source: London Loves Business

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Alternative finance key to British business growth

Alternative finance holds the key to funding expansion for many British small businesses, as access to funds from traditional lenders remains restricted. According to a recent survey of 1,000 small business owners, almost one in three reported difficulties in securing business loans from banks, potentially halting their expansion plans.

To help address this issue, Worldpay has announced a three year extension of its popular Business Finance scheme, aimed at helping over 300,000 British small businesses access alternative financing by enabling access to a “cash advance” based on their future credit and debit card sales. The scheme, launched in 2015 in partnership with Liberis, a leading provider of cash advances to small businesses, has already provided funding in excess of £50 million to UK SMEs. Under the scheme, funds can be made available to businesses in as little as 72 hours.

Chris Andrews, proprietor of Blacks Cheese, is one business owner who has utilised Worldpay Business Finance to help address stock purchasing needs.

“Worldpay Business Finance became apparent as an alternative method of funding the business, at a time when we needed it instantly and it was delivered within a matter of hours. Worldpay is now part of our financial reckoning, and it’ll be one of our tools that we’ll always use and it’s not going to be something that we need to consider. We know how it works, we know how it funds us – it’s paid off for us.”

Alternative finance, while available to all types of small business, is proving particularly popular with start-ups. Worldpay’s research revealed that businesses under five years old are as likely to select alternative finance methods to secure capital as approaching banks. Analysis by Worldpay of how these funds are used reveals that in 2017, direct investment in businesses, including stock purchase, expansion & refurbishment funds and equipment purchases drove 87 per cent of the cash advances.

Despite its growing popularity, the research also revealed that business cash advances are among the least known forms of funding, with only 2 percent of businesses indicating an intention to use this form of finance in 2018. At the same time, business owners aged under 35 indicated they are more likely to place their confidence in alternative financing as a way to reduce their reliance on banks, with 40 percent stating its emergence will make things easier. With the extension of the Business Finance scheme, Worldpay and Liberis will work to address this lack of awareness.

“Steve Newton, Executive Vice President, UK and Europe Worldpay said: “Worldpay Business Finance has proven extremely popular with small businesses looking for alternative methods of finance. Worldpay Business Finance was created specifically with the unique needs and structure of small businesses in mind – it’s flexible and it’s fast.

“In 2017, we tripled funding for growth to UK SME businesses and have now advanced over £40million – but we know that this form of funding has the potential to help thousands more.  So over the next year, we’ll make it easier to access the scheme by increasing call centre and online support to enable Britain’s small businesses to thrive.”

Source: London Loves Business

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Small firms look askance at bank borrowing as alternative finance models rise

Smaller British businesses are increasingly wary of bank borrowing even if it means forgoing growth, according to new data to be published today.

Some 70 per cent of small British firms are willing to avoid borrowing money, even if it means giving up on growth, the data from the British Business Bank will show.

Demand for bank loans from smaller firms fell to its lowest since comparable data was first collected in 2011, with only 1.7 per cent of small firms seeking new loans.

However, Keith Morgan, head of the government-owned BBB, said the UK has a “thriving start-up and growth culture”, but that firms need to be able to access finance to be able to move to a higher gear of growth.

“They do have to have access to long-term, patient capital,” Morgan said. “We certainly can’t be complacent in our current position and we need to invest in these companies.”

The BBB recently stepped in to offer support to the small firms which were contractors of the collapsed construction and outsourcing firm Carillion. At the start of the month it said it will work with private-sector lenders to enable them to offer £100m in loans.

“We can point very firmly to evidence that this type of intervention works,” Morgan said.

He also hailed the “encouraging growth” in alternative finance models to the traditional banks as a sign of increased choice for smaller firms.

“Small businesses are prepared to shop around more”, he said, with the internet and the recent proliferation of non-traditional lenders aiding the increase in competition.

Peer-to-peer lending surged by over 50 per cent in 2017, while asset finance enjoyed double-digit growth for the fifth year in a row.

Firms are also seeing increased success for equity fundraising, with a 79 per cent jump in the first three quarters of 2017. While the amounts raised were skewed towards the biggest start-ups, the number of equity fundraising deals also rose by 12 per cent, after dipping in 2016.

Source: City A.M.

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Boost for alternative lending market

Advisers rejected by banks and other traditional lenders should consider the alternative lending market, a lending specialist has said.

Jamie Stewart, director at Think Business Loans, said that between November and December the sector saw a huge demand for its services, largely coming from the adviser market.

But Mr Stewart said some advisers are still reluctant to approach the alternative lending space because they have a perception it is costly and complicated.

He said: “Nearly 100 per cent of our clients have been turned down by their banks and then plopped into the world of alternative lending, not knowing where to start. But a lot of these peer-to-peer business loans are cheaper than the banks.”

Advisers approaching the company have cashflow and investment enquiries, with some businesses potentially looking to increase their pay-per-click marketing spend or wanting to expand.

Mr Stewart added: “IFAs come to us for a number of funding requirements: in fact, the whole spectrum of purposes, from aspirational stuff like management buyouts, acquisitions, and more general funding like asset finance, cashflow loans, commercial property investment and development projects, to more niche requirements around pension-led funding, as well as private equity, and investment opportunities via the alternative market.

“As there are now so many [fund] boutiques throughout the sector, many will happily take a look at a creative project, which is drawing in the interest of more and more IFAs to this market and our application.”

Advisers are also looking for funding to help develop their tech capabilities. More recently, advisers have been seeking additional capital to help clients with bitcoin needs. Due to the nature of this industry, traditional banks are relatively averse to the entire sector, which has drawn advisers to the alternative commercial finance market.

Mr Stewart said: “In the past six months, bitcoin mining has been big. IFAs are helping their clients to mine bitcoins by buying servers and hardware machines.”

The lenders on Think Business’s panel have a broad lending criteria, ranging from, the amount required versus turnover, the purpose of the funding, director and shareholder ownership, to experience and historic business performance. The panel also includes traditional and alternative lenders.

A report in December by the Cambridge Centre for Alternative Finance, found that in 2016, business funding transacted for start-ups and small and medium-sized firms grew by 50 per cent to £3.3bn, from £2.2bn in 2015.

In total, it is estimated that 33,000 firms used various debt, equity or non-investment based alternative finance channels and instruments to raise funding, which represents around 2.5 per cent of the UK’s 1.3 million employers.

Back in November 2016 the government launched a bank-referral scheme to urge banks to pass on the details of small businesses they have turned down for loans to finance platforms, who would then share the details with alternative finance providers to approach those businesses concerned.

Jane Hodges, financial planning managing director at Money Honey, said alternative finance, enterprise investment schemes and using the services of networks were among the sources of funding available to advisers.

Source: FT Adviser