The Alternative Finance market provides an example of how technology – coupled with a real awareness of a gap in the existing market – can drive rapid change. And it’s a change that has brought benefits to both businesses seeking capital – by creating another source of funding – and investors who can benefit from a new form of syndication.
Rapid change can never be taken for granted. Digital technology has indeed changed the commercial landscape in many sectors, but sometimes the pace of disruption has been relatively slow. A case in point is the first Internet-enabled phones that were launched in 1999, but it wasn’t until Apple released the first iPhone almost a decade later that the mobile revolution began.
Seen in that light, the rapid growth of the UK’s Alternative Finance Industry has been remarkably fast.
The first Peer to Peer (P2P) and equity crowdfunding platforms appeared in the UK in 2011 and within a couple of years, they were attracting significant interest from investors and businesses in search of capital. Less than a decade later, Alternative Finance – AltFi – is an established segment within the wider financial services marketplace. Platform lending – which enables communities of investors to come together to provide funds under a syndication arrangement – has established itself as a particularly important source of funding. According to the Peer2Peer Finance Association, around £3bn was advanced to borrowers by its members in 2018 and that figure – impressive in itself – does not represent the entirety of the platform lending market.
So what lies behind the popularity and rapid growth of the platform lending market?
The Bank Dilemma
Well in the first half of the decade you could probably make a case for saying that the primary driver of market growth was a shortfall in traditional bank finance. In 2011, the banks were still picking themselves up after the financial crisis and they faced a real dilemma. They were certainly under pressure to lend to SMEs, but regulators were also telling them to repair their balance sheets and not take unnecessary risks. There was a tendency for them – perhaps understandably – to err on the side of caution. It became harder to borrow. Platform lenders stepped in to fill a gap in the market.
But that is only part of the picture. Today, the platform lending corner of the Alternative Finance market is continuing to grow at a time when the banks themselves are also more than willing to lend.
One important factor is that platform lending is not only providing an available form of finance, it is also offering an alternative that might be more suitable to a business owner at a particular time. As Alex Innes, Head of Legal and Due Diligence at The Route – Finance observes: “The best advice for any borrower is just to find the right type of funding. That may well be mainstream funding but it could be that it is in the Alternative Finance market where there is more flexibility and a number of different products.”
To view the complete interview with Alex Innes, click here.
The Supply Side
And from an investor perspective, platform lenders provide a means to spread the risk by investing alongside others. “From the investor’s perspective the great thing about the syndication is it very much spreads their risk, they’re not having to invest all their money in one project,” says Alex Innes.
In the case of The Route – Finance, it is equally important to say that comprehensive due diligence serves to keep the risks associated with lending to a minimum. Typically investors will be committing capital to relatively short term loans, typically 6-12 months, meaning that money is not tied up for long periods. This in itself is a very attractive feature for the High Net Worth individuals, family offices and institutions that comprise The Route’s investment community.
And it also dovetails neatly with the requirements of the platform’s borrowers. For example, in recent years, The Route – Finance has proved attractive to property developers. Often a property entrepreneur will need to borrow a relatively large sum for a short period – around a year – to fund the first stage of a development project. The Route – Finance offers entrepreneurs certainty of funding, subject to successful completion of the due diligence process. The investors benefit from secured lending that yields higher returns over a short timescale.
It is a virtuous circle.
Stepping back to look at Alternative Finance market as a whole, one of the key factors in its growth has been the ability of the various models to offer benefits both to those raising capital and those who invest.
To find out more about business loans from The Route – Finance call 020 3141 9040