A Shifting Balance – Why Alternative Finance is Winning Market Share

Marketplace lending is now an established segment of the UK’s business finance ecosystem, but until relatively recently it has perhaps been considered as an ‘alternative’ solution – something that sits outside the mainstream.  

It’s a perception that may be changing, as debt platforms take an increasingly large share of the SME lending market.  

Indeed, you could could argue that 2017 was the year in which a youthful marketplace lending industry came of age. For instance, in the three months to September (as reported by the FT) Peer-to-Peer lender, Funding Circle recorded £114m in new net lending to SMEs, in contrast to £95m carried out by the four largest banks.  It was an example of how the balance of market share is shifting.   

Boom in Business Lending

And platform lending has proved particularly attractive in the business-to-business market. According to research published in December by the Cambridge Centre for Alternative Finance, ‘Peer-to-Peer’ lending totalled £1.26bn in 2016, making it the largest segment of the market, ahead of consumer and property lending. Citing British Bankers Association figures, the report noted that Peer-to-Peer accounted for 15% of all lending to small businesses over the year in question.

The New Finance Market

This is, of course, all part of a much bigger Alternative Finance (AltFi picture) which – according to the Cambridge Centre’s report – accounted for £3.3bn in finance to startups and small businesses in 2016.    

In other words, what we really are seeing is a shift in the market balance between traditional finance providers and a new generation of AltFi platforms.  

So why is this recalibration of the market taking place and at such as a pace? After all, Alternative Finance as we know it today is barely more than five years old.  

What Has Changed?

You can make the obvious point that nature abhors a vacuum. When traditional sources of funding dried up in the wake of the ‘financial crisis,’ businesses were desperate to find new sources of capital. By a happy accident, the finance drought coincided with the development of a broad range of online market models that brought together suppliers and customers. In the terms of the debt market, the market principles that underpinned, say, EBay or a Recruitment site could equally be applied to lending by matching communities of investors/lenders with businesses and individuals in need of finance. Meanwhile the new generation of crowdfunding sites applied the principle of crowdsourcing to an equity model. That much is history.

But Alternative Finance has done more than simply provide a couple of one-size-fits-all models ( namely, equity crowdfunding and marketplace lending) as an alternative to traditional sources of capital. As the industry has grown and evolved, models have emerged that suit a range of business circumstances. For instance, in the debt market, a company in need of a term loan may go to a Peer-to-Peer lender. If, however, cashflow is the issue, then the solution may be invoice trading (a platform-based variation on the invoice discounting theme). In addition, many lenders have their own focus. Not all are generalists.  The Route — Finance, to take an example, focuses on special situations lending, with High Net Worth individuals comprising the lending community.  

Better Service

In the business lending market, in particular, companies often find that providers are easier to deal with than traditional banks. Loan applications can be made quickly, there is, generally speaking, a high degree of transparency over lending criteria and interest repayment models, and it can be quicker to get a ‘yes’ or ‘no’ answer.

The X Factor

In consequence, trust in the Alternative Finance market is growing. And ultimately, this may be the X Factor that will ensure the Altfi market will continue to flourish and take an ever bigger market share. The platform model has ensured that more finance is available. Growing trust is helping to ensure that an increasing number of businesses are prepared to take advantage of that availability.  

There was a time when lending and crowdfunding platforms were seen as a last port of call when other sources of finance had said no. As the Cambridge Centre for Alternative Finance report, along with further growth in the market in 2017, illustrates, that is no longer the case.

Businesses should not see the market as homogenous. Each provider has its own model. To find out more about The Route — Finance and its lending criteria call:  call: 020 3141 9040


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