The Alternative Finance sector continues to grow. Admittedly, almost a decade on from the launch of equity crowdfunding platform, Crowdcube and Peer-to-Peer Lender, Funding Circle, the dizzying growth of the early years has slowed to something that is more sustainable, but that is only to be expected in a maturing market. The real story is that alternative finance providers are continuing to increase their market share at a time when businesses also have a range of “traditional” options to choose from.
According to the latest report from the Cambridge Centre for Alternative Finance, 2017 marked the seventh year of substantive market growth. And while the expansion of the market may be slowing, the year-on-year change between 2016 and 2017 still came in at a hefty 35.7%. In money terms, alternative finance providers channeled £6.9bn to businesses in 2017, with 68% of that coming from online platforms.
As the CCAF observes, Alternative Finance is now well established as a funding source for SMEs. That is particularly true of debt, which accounted for 90% of the funds raised.
But Alternative Finance does not exist in a vacuum. Those working in the sector are well aware that business owners have choices and that many will consider their own bank to the first port of call. And according to separate research by the British Business Bank, money loaned by banks (excluding overdrafts) to SMEs continued to grow in 2017 and early 2018, although demand dropped.
But the striking thing is that the market share of platform lenders is continuing to increase – rising from 0.3% in 2012 to 9.5% in 2017. In other words, even though banks are taking a positive approach to lending to SMEs, many small firms are looking to Alternative Finance. It’s a positive choice.
This reflects The Route – Finance’s own experience, as in 2018, The Route completed a record-breaking number of deals, with the majority of funds in respect of development deals.
And that, of course, begs the question, Why?
Well, one answer is that awareness of Alternative Finance products has slowly but steadily grown since 2011. When Crowdcube and Funding Circle launched their respective businesses, equity crowdfunding and P2P lending were unknown quantities. Initial growth in the sector came from early adopters who were willing to see if these particular solutions worked for them.
Fast forward to the present day and Alternative Finance products are much more familiar to businesses and to brokers. That’s not to say that this revolution is complete. The British Business Bank survey notes that many – indeed a majority – of SMEs are not aware of alternative financial products. There are also regional differences in awareness.
In other words, there is still work to be done to educate business owners and that’s certainly something that increasing numbers of brokers are setting out to do. And as awareness grows, market share is also likely to increase further.
Alternative Finance platforms emerged in response to market need. Banks had pulled in their horns in terms of lending to SMEs and innovators stepped in to fill the gap. Things are different today and yet P2P lenders – and specialist platforms such as The Route – Finance’s Private Dept Platform – have grown market share.
That is due in part to the fact that platform lenders were challengers to the status quo. They were disrupting a market and to do that effectively they had to offer something that traditional lenders were failing to put on the table. Initially at least, you could argue that the lure was the availability of capital. Banks weren’t lending, but a business could borrow from a community of investors pooling their resources.
But there is something else at work. Platform lenders typically offer an easy and transparent online application process and, crucially, a relatively fast yes or no. This suits the way that businesses often have to work. They have to respond quickly to situations and can’t afford to spend months negotiating with banks and waiting for a Credit Committee response.
There have always been specialists in the business finance market, but the rise of platform lending has brought this to the fore. Initially, platforms offered mainly term loans, with interest rates based on risk and the amount borrowed. Today there are more niches. These can be sector-based – for instance, property – or focused on ‘special situations’. For instance, The Route focuses on special situations lending that might fall outside the risk criteria of traditional banks. And then there is specialisation in terms of products. For example, platform-based invoice trading provides a flexible alternative to offline factoring and invoice discounting providers.
This diversity is providing businesses with a smorgasbord of options, with financial products available in response to circumstances and need.
That ability to meet the changing needs of businesses will be key to the continuing growth of Alternative Finance and players in the market are continuing to innovate.
The Route – Finance is no exception. For instance, The Route is launching a new product in response to market demand – an offering which allows businesses such as property developers, to mix debt, equity and senior debt. This will provide these businesses with more flexible funding options, geared to the nuanced needs of particular sectors, without, for example, having to dilute ownership through equity-based joint ventures. Crucially, if a deal makes commercial sense, it may be that The Route can help where other lenders cannot.
The Route expects Alternative Finance to continue to grow market share, not least because the requirements of SMEs can no longer be served by a relatively narrow range of bank providers.
To find out more about The Route – Finance call: 020 3141 9040