The alternative-finance way of matching borrowers and lenders is yielding exciting results
Cambridge University and Nesta recently published a report entitled “Understanding Alternative Finance”. According to the report, the alternative finance market in the UK will have provided £1.74 billion during 2014 and this compares to £267 million in 2012 and £666 million in 2013. The authors of the report make the astonishing prediction that £4.4 billion of finance will be provided from alternative sources during 2015.
Alternative finance includes person-to-person lending (P2P), person-to-business lending (P2B), equity crowdfunding, invoice discounting, community shares, rewards-based crowdfunding, pension-led lending, debt-based securities and donation-based crowdfunding. Amongst all of these, the report found that P2B lending, which is the space that Money&Co. occupies, was the largest and it predicted that the total amount that will be lent to companies via platforms in the UK for 2014 will be £749 million. This represents growth of 250 per cent over the three years to the end of 2014.
Growth in some sectors of the alt fi market is extraordinary
The authors of the report analysed 3,112 loans made via P2B platforms and discovered that 63 per cent of businesses grew profits after receipt of their loan and 53 per cent increased the number of employees within their business. 33 per cent of the companies that borrowed money through P2B platforms stated that this was the only source of finance for them.
At Money&Co., we have seen a high level of interest from manufacturing companies in sourcing loans through our platform and this was borne out by the research, which showed that the largest sector exposure for platforms was manufacturing, representing 23 per cent of the loans made. The next largest sector was professional and business services, which represented 14 per cent and this was equaled by retail. Thus, 51 per cent of the 3,112 loans made were directed to these three sectors.
This research underlines the shift that is occurring as the banks pull back from lending to smaller companies and alternative providers come in to fill the gap. In the UK, it is still the case that 92 per cent of lending to SMEs comes from the banks and only 8 per cent from alternative financiers. In the US, 18 per cent of financing for SMEs comes from alternative providers and, if the prediction made in the report is to be believed, it looks as though there is going to be a rapid shift in the share that alternative providers have in the UK towards this level.
The government has recognized that lending through P2B platforms alongside individuals looking for a better return on their cash is a quick way of injecting much needed funds into the SME sector. The fact that companies are reporting an increase in employment and profitability following receipt of their loans suggests that this has been a sensible strategy and that a continuation of this policy will help to support the economic recovery. In addition, it should soon be possible to include these loans in a NISA, which will divert further funds into the sector and provide additional support for companies looking to grow.
The growth rates being experienced by the various segments of the alternative finance market are truly extraordinary and there is a real sense that there is a permanent shift occurring in terms of the way that companies will be financed. This can only be good news for entrepreneurs and those seeking to grow their businesses.