Finance · 17 February 2016

Alternative finance taking growing portion of small business lending market

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Alternative finance represented 12 per cent of the small business lending market in 2015

The online alternative finance market is taking an increasing percentage of small business lending and investment in UK startups, a new report has found.

Alternative finance platforms accounted for 12 per cent of the small business lending market in 2015, with equity crowdfunding providing 15.6 per cent of total UK startup and venture-stage equity investments.

The report, published by the Cambridge Centre for Alternative Finance and the innovation organisation Nesta, demonstrated that the online alternative finance market nearly doubled in size last year, growing by 84 per cent. However, the rate of growth slowed from 2014, when alternative finance grew by 161 per cent.

“Although the absolute year-on-year growth rate is slowing down, the alternative finance industry still recorded substantive expansion across almost all models,” the report said.

The increasing institutionalisation of alternative finance was highlighted, with around a quarter of all peer-to-peer loans now funded by institutional investors like the government, banks or development organisations like the British Business Bank. The report also identified an increasing trend towards donations-based crowdfunding, alongside a perceived increased risk of fraud and malpractice within the industry.

“We should celebrate this massive increase in market share,” commented CEO of MarketInvoice, Anil Stocker. “Alternative finance is alternative no more, businesses have been under-served and badly-served by banks for decades, it’s no wonder they’re looking for something new.”

Referring to the various channels and instruments that have emerged outside of the traditional financial world of regulated banks and capital markets in recent years, alternative finance now includes online marketplace practices like reward-based or equity crowdfunding, as well as peer-to-peer lending, invoice financing and third-party payments. Frequently technology-enabled, the various instruments of alternative finance often include cryptocurrencies like Bitcoin, as well as “shadow banking” tools like social impact bonds, mini-bonds and community shares.

Due to the rapid growth of alternative finance, some commentators have questioned the industry’s long-term sustainability. Global co-lead of fintech at KPMG, Warren Mead, said: “Being part of the financial establishment doesn’t sit well with original social purpose of alternative finance.”

“Meanwhile, platform failures within these growing networks are inevitable. So, the question is, will the hard won enthusiasm for alternative finance start to wane?” added Mead.

Nesta’s executive director of policy and research, Stian Westlake, said that alternative finance, like any sector, is sure to face challenges as it matures. “Another financial crisis would certainly test the robustness of peer-to-peer lending,” Westlake commented.

Want to know more about an increasingly popular alternative financing method for small business? Read our expert’s guide to invoice financing.

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ABOUT THE EXPERT

Fred Heritage is deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London. He previously worked as a reporter at Global Trade Review magazine.

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