If the past four or five years are anything to go by, the alternative finance market is unlikely to rest on its laurels as we move towards the end of the decade and beyond. As businesses become more comfortable with new ways of getting funding, the AltFi market will not only grow, but will also evolve.
We’ve already witnessed a period of rapid change. The term ‘alternative finance’ certainly isn’t new. Prior to the launch of pioneering debt and equity platforms such as Crowdcube, Seedrs and Funding Circle, it was often applied to the practice of lending against outstanding invoices and physical assets such as property. Long before the launch of platforms based on crowdsourcing and collaborative economy concepts, specialist invoice and asset lenders were providing businesses with a viable alternative to term loans and overdrafts from high street banks.
If lending against invoices and assets established demand for alternative finance, it was US platforms such as Kickstarter and Indiegogo that validated the concept of platforms bringing together people willing to commit cash with business or individuals in need of support. Often focused on smart new tech or creative projects, these platforms were about pledging cash in return for a reward rather than lending or purchasing equity. However, in the context of the UK’s regulatory system, this model was adapted to embrace equity investment and peer-to-peer lending.
An Explosion of Activity
Since 2011, there has been an explosion of activity, with existing platforms honing their own operations and new players coming online. The result has been a diverse and rapidly changing market. For instance, when Crowdcube launched, it was positioned as a platform where “armchair dragons” could commit as little as £10 in return for equity. Today, the armchair dragons still use Crowdcube but average investments have grown to £1,789. And while 44% of investors are classed as “everyday,” 47% are High Net Worth Individuals (HNW). The platform has also innovated with bonds. Meanwhile, other crowd-based platforms focus on specific sectors or – like Syndicate Room – have professional investors leading the rounds.
On the debt side of the equation, peer-to-peer lending has been complemented by platforms based on private loans from sophisticated investors. The Route – Finance’s own Private Debt Platform is one such example.
We can only assume that the rapid evolution of the industry will continue. So what trends are we seeing and what might this mean for the future?
Alternative Finance will Simply Be Finance
These days we don’t think of asset and invoice lending as ‘alternative.’ Going forward, the likelihood is that businesses and consumers, particularly of the upcoming generation, will view alternative finance platforms as just another tool in the box. For instance, last year a survey by US peer to peer platform, Lending Club, found that 50% of millennials see no future for conventional banks. Going forward, they expect to be catered to by a range of finance providers. In other words, the view of the bank as a one-stop shop is slipping.
Debt is from Mars and equity is from Venus. At least that’s the way we tend to look at the alternative finance market at the moment. Some platforms specialise in matching lenders to borrowers. Others focus on equity crowdfunding. But many businesses have a requirement for both debt and equity finance, or ‘Blended funding.’ This creates opportunities for either hybrid debt/equity platforms, or closer collaboration between providers.
Diverse Sources of Funding
As alternative finance establishes itself in the mainstream, the community of investors is set to become even more diverse.
This trend is already well in play. In both crowdfunding and debt finance, ‘everyday’ investors have been joined by angels, VCs, High Net Worth Individuals and institutions. What we are also seeing is funds created specifically to provide investors with exposure to the alternative market. For instance, an SME Income Fund has just been launched by Funding Circle.(http://www.altfi.com/article/2852_funding_circle_sme_income_fund_raises_142m)
This diversification helps provide more funding to SMEs.
The shape of the alternative finance market in any particular country is dictated both by culture and – more importantly – by the regulatory regime operating in each jurisdiction. Nevertheless, there is scope for international expansion. For example, Nordic operator FundedbyMe has just expanded into Finland via a franchise deal. Players with an international reach increase opportunities for investors while also pulling in new sources of funding for businesses.
More Technology and Less Technology
Big data analytics will certainly change the industry and particularly some parts of the peer-to-peer lending market. In the consumer-facing segment, data has already started to drive much faster decisions on loans. However, where larger loans to SMEs are concerned, human-led decision-making will continue to play a vital role in assuring investors. The team at The Route – Finance emphasizes that personal touch in its own due diligence process, taking the time and effort to understand the story behind a business and its management team.
A Blurring of the Lines
Banks were quick to move into asset based and invoice lending. In years to come, we may see banks partnering with alternative providers. Currently, this is taking the form of referral deals – such as the recent partnership agreement between Funding Circle and Santander to point customers in each other’s direction. Eventually, banks may take a more proactive role by establishing partnerships through which they can offer alternative finance solutions directly, or by developing their own services.
Ultimately, the only certainty is continual innovation, which can only serve to widen the range of options for businesses and consumers.