July saw a $9.1 billion reach in Europe’s alternative finance market, accumulation more than 1000 deals with the UK leading the way with almost 400 raised in the first quarter of 2017. Future Trends in U.K. Banking estimated that the UK Alternative Finance (“AI”) Finance Market is projected to reach £10 billion by 2020.
Alternative Lending platforms have become a growing phenomenon in recent years. Smaller companies are often denied credit in traditional capital markets — alternative lending provides them with the financing they need. This poses a real competition to traditional bank funding, which has higher barriers. New mechanisms, reactionary to the competitive levels and borrower demand, have boomed. Often in the shape of online platforms, which focus on peer-to-peer lending, offer larger returns than marketplace lenders (MPLs) traditionally offer.
The UK remains one of the largest contributors to the Alternative Finance (“AF”) market. AI trends are rising — equity crowdfunding has had the strongest 6 months in the first half of 2017. There is a widespread willingness from investors to put their money in UK private companies as the returns tend to be higher.
Room for growth
Small and medium-sized enterprises (SMEs) suffered a large loss due to the lack of AI awareness. According to GLI Finance’s report, £20bn were lost in 2015 to the UK economy as a result. Industry stakeholders called for the Government to address the concentration risk in the credit ecosystem over a year ago. There is still vast room for growth, nevertheless the advances have been made and there is a large focus on SMEs growth.
As SMEs play a large role in the success of the UK economy, Parliament addressed in its Fifth Special Report (October 2016) following the Governments response to the Business, Energy and Industrial Strategy Committee. Key recommendations have been put in place, namely:
1. We recommend that the Government directs resources towards promoting the SEIS, EIS and VCT schemes. This includes the British Business Bank working with HMRC to consider how to improve promotion of the scheme;
2. We recommend that the Government to identify the size of current European Investment Bank contribution in the UK economy, the timetable for current commitments, and make a clear statement on Government plans to ensure that the current level of funding will not be reduced.
3. We recommend that the Government and the British Business Bank build upon the success of the Angel CoFund, ensure it is funded adequately to meet demand, and consider how it could be expanded.
4. We recommend that the Government introduce a fifth performance indicator for the British Business Bank to assess its effectiveness in incentivising lending and investment activity in all parts of the UK.
5. We recommend that the British Business Bank explain to us, in the response to this Report, their strategy for promoting understanding of the Business Finance Guide, how it will identify and target hard to reach groups, how it will measure any increase in the awareness and take-up of alternative finance products, and its analysis of the feedback from SMEs on the Business Finance Guide. Furthermore, we recommend the Bank explain how they will analyse the volume of traffic to the online Business Finance Guide and how that will inform their strategy for increasing awareness of understanding finance options.
6. We recommend the Government sets out in its response to this Report how they intend to monitor the implementation of the Small Business, Enterprise and Employment Act 2015 and, if need be, review the Act to ensure the banks are fulfilling their obligations to provide data when they are required to.
7. We recommend that the Government explore allowing the Credit Reference Agencies and authorised finance providers access to financial data in the VAT Register, subject to the appropriate safeguards.
8. We recommend that the Government set out, in its response to this Report, the timetable for implementation of the referral scheme and how it intends to assess its success.
9. We recommend that the British Business Bank’s collection of feedback regarding the Business Finance Guide specifically seeks views on the range of alternative finance providers and the products available. We further recommend that they set out how that will inform their strategy for increasing awareness of understanding finance options, and how the alternative finance sector can be promoted among those in the accountancy, legal and banking sector involved in giving face to face advice to SMEs.
Since the introduction of these recommendation, progress is underway. Enterprises seeking alternative financing have a wide range of options, ranging from peer-to-peer lending to crowdfunding. The alternatives to traditional bank lending are growing, hoping to decrease the already-lowered 56% of SMEs who are not aware of the non-traditional fundraising methods available.
We would like to know the opinions of our readers surrounding SMEs and the potential growth of their funding options. If you have any recommendations or opinions you would like to share with us, email us over at firstname.lastname@example.org.
Elizabeth Frumson © Amio Wealth Limited (August, 2017)