The credit crunch fuelled recession that swept the globe between 2007 and 2009 quite naturally – and quite fairly – has a bad reputation. Politicians, finance professionals, business owners, private and public sector workers, and everyday consumers – practically everybody has been affected in some way or another by the chaos that came out of the economic downturn. We’ve all spat out the bitter-tasting words ‘financial crisis’ at some point – followed, more often than not, with some equally vinegary mutterings aimed squarely at the banks and/or bankers that created the mess. In fact, the dissonance has been so loud as to cause a distraction from the decidedly prosperous and positive developments that began taking seed even before the credit crunch struck – until now.
Not everything that grew out of those rainy days of the economic slump was bad. It cannot be denied that the financial crisis ushered in a largely unforgiving era in which many SMEs struggled to gain access to the finance and funding that they needed to grow – especially from traditional lenders (i.e. banks). But, where unmet demand flourishes, so too does invention, and that very necessity proved to be the mulch that has fructified the booming alternative finance sector that is thriving today.
Pick up any financial journal, newspaper or log on to any online report today, and you will see P2P lending and crowdfunding platforms heralded as being at the vanguard of an alternative finance movement that is proving to be the rose that has grown from the concrete collapse of the banking system as we have always known it.
In the past, when SMEs have found themselves in a position where a loan has been required in order to grow, they have instinctively turned to the one place where they presume such funding to solely come from – their bank. However, in the wake of the financial crisis, mainstream banks have simply not been able to deliver these funds like they have done previously. In fact, as many as 50% of first time borrowers have been rejected finance by their bank, according to the UK Department For Business Innovation and Skills.
This unmet demand has of course been big news since the economic collapse, but it is only relatively recently that the alternative finance solutions have started to enjoy the resounding success and media exposure that they have long deserved.
Yes, alternative finance appears at first glance to be the new kid on the block, finally clearing up the mess that mainstream banks are now – due largely to burdensome regulations – unable to rectify themselves. But in reality alternative finance platforms have been around for years – even before the credit crunch began raining down its devastation on the UK and global economy. In fact, what is now considered to be ‘alternative’ means of finance actually predates mainstream banking by hundreds if not thousands of years.
Before There Were Banks…
In a time long before banks, insurance firms and finance companies roamed the Earth, individuals and start-up businesses found their own means of borrowing, lending and financing their pursuits and endeavours.
Indeed, as Dr Simon Ashby writes for Business Reporter:
“We have evidence from the Bible that wealthy merchants were lending to those less fortunate than themselves in religious temples, something we really would consider alternative today, but it was arguably logical (if not entirely ethical) at the time, because it was a place most people visited. We also had the coffee houses in London, which formed the basis for modern insurance markets – again, a place where those in need of 18th century financial services frequented on a regular basis.”
But, as Ashby goes on to note, the last couple of centuries saw the steady rise of what is now considered to be ‘traditional’ or mainstream financial institutions – the organized, gigantic monopolies that we call banks, and upon which the whole economy of the world balances, grows and/or collapses as the case may be.
The Rise And Rise Of Alternative Finance
Nations, governments and citizens the world over have accepted these financial institutions as an immovable and therefore irreplaceable norm for decades – and then the internet came along and began to change everything.
The ability of the World Wide Web to connect people instantly has been nothing short of revolutionary to practically every industry on the planet – marketing, healthcare, public services, banking, or, to put it more accurately, finance.
Dr Ashby once more:
“In recent years a bewildering array of so-called alternative finance options have emerged, aided by the internet and social media to help connect those in need of finance with those who have money to invest. This includes the growth in peer-to-peer lending, crowdfunding initiatives and Dragons’ Den-style business angels. Such options are not necessarily more expensive than traditional bank products and can provide greater returns for investors at a lower cost for borrows – thanks partially to more efficient business models, sophisticated IT systems and lower levels of regulation.”
Ashby’s point is most certainly true – over the past two or three years the number of alternative finance options that have emerged has indeed been “bewildering”, and it almost seems as if the whole movement is something brand new. But the reality that alternative finance practitioners have been doing what they do for years is not to be forgotten, even if it is only now that it has started to enjoy the limelight.
UK P2P Lending – Tracking A Decade Of Growth
The world’s first company to offer P2P lending was Zopa, which was founded in 2005 2 years before the advent of the financial crisis. Having lent £934 million to over 110,000 people since 2005, as the pioneer of the model, Zopa remains Europe’s largest peer-to-peer lender, using the internet to cut out the banks entirely, matching savers with individuals who are looking to borrow.
The Route – Finance has provided debt and equity investment via its Private Debt Platform (PDP) and Equity Investment Ventures (EIV) Propositions since its inception in 2008, with over £36 million having been raised via these platforms to date.
Jump forward to August 2010 and we welcome the arrival of Funding Circle, the first P2P lender to manage business funding in the UK. Savers use the platform to lend money directly to SMEs, again, bypassing the banks entirely. To date, Funding Circle has lent over £706 million to businesses, and now operates in both the UK and US markets.
September 2010 saw the arrival of RateSetter – the first P2P lending platform to use a provision fund, which safeguards lenders against borrower defaults. As such, 100% of funds have been returned to lenders since the platform’s launch.
MarketInvoice launched in February 2011, becoming the very first peer-to-business lender to lend specifically against invoices.
£3.8 Billion Lent To Date
According to AltFi Funding, there are now 108 alternative finance providers in the UK – a truly remarkable figure for a sector that is indeed described as being ‘alternative’.
As of June 28 2015, the cumulative total lent by P2P lenders in the UK amounts to £3,844,071,213, meaning that the sector is on track to lend the £4.4 billion by the end of the year as has previously been forecast by Nesta.
No longer just a niche industry, nor indeed the unsung hero of SME lending, the rise and rise of alternative finance is now coming into focus, and what has been happening in the sector over the past 10 years will no doubt prove to be merely the first steps in a seismic shift in the way SMEs go about accessing finance in the future.