What does the future hold for the Alternative Finance industry? Or to be more precise, after a year (2017) in which Altfi consolidated its position as a mainstream funding option for SMEs, how will the market develop in the year ahead?
To some extent, the direction of travel is clear. In December 2017, the Cambridge Centre for Alternative Finance published an in-depth report, highlighting the rapid growth of AltFi, particularly as a source of funding for SMEs.
Although the researchers based the report on historical data from 2016, two trends were clear. On what some might see as the negative side of the equation, the AltFi industry had undergone a certain hollowing out, with substantial numbers of platforms (more than 30) ceasing to trade.
But that was only part of the story. Across 2016 the total volume of funding attributable to AltFi platforms was up 43% on the previous year to a total of £4.3bn. SMEs were the main beneficiaries, accounting for three quarters of the total.
And the report painted a picture of an increasingly mature market. After the rush of new players that characterised the first two or three years of the platform finance boom, what we’ve been experiencing over the last two years is a smaller number of providers, strengthening their position and increasing market share. According to the Cambridge report, the top five platforms are now responsible for about 64% of total AltFi funding.
Looking to The Future
Looking ahead to 2018, the likelihood is that the sums raised via Alternative Finance platforms will continue to rise.
That will be partly due to demand. The UK economy is continuing to grow, creating expansion opportunities for entrepreneurial companies while underpinning the future viability of longer-established SMEs.
That’s the good news. On the debit side, there is still a huge amount of uncertainty hanging over UK PLC. The lack of clarity over the final shape of any Brexit agreement with the EU is one major factor, and with large businesses reportedly holding back on investment decisions, at least some of the SMEs that supply are potentially facing cash flow difficulties.
Growth finance may also be hard to secure, at least from traditional sources. When asked about the economic prospects for the UK in the post-Brexit era, policymakers rightly cite the importance of a buoyant entrepreneurial culture. The abundance of startups and early stage companies operating in the UK is clearly a good thing, but by their nature. entrepreneurial businesses are risky and finance is often difficult to find.
Alternative Finance has become a crucial source of funds, across a range of situations. Invoice Trading has established itself as a flexible means to manage cash flow by borrowing against company debtor books. Peer2Peer lending is fulfilling a number of roles, ranging from the provision of cash to buy new equipment or loans to enable businesses to navigate their way through a downturn in trade. Meanwhile, crowdfunding will continue to fuel the entrepreneurial boom.
The Future For Innovation
But that leaves a question – namely, is the innovation phase of Alternative Finance over?
Actually innovation continues as new funding options emerge. For instance, throughout 2017 an increasing number of businesses were raising funds through so-called Initial Coin Offerings or ICOs. Put simply, an ICO enables investors to buy tokens which in turn allow them to use the services of startups or early stage businesses. This provides the businesses themselves with upfront funding. It’s a bit like rewards crowdfunding. But the appeal of ICOs to investors is that the ‘tokens’ are also units of blockchain currency, which can be traded. And as a business achieves success, the value of the token will rise. Investors can cash in by trading the tokens. We can expect to see more platforms offering exposure to ICOs in the coming year.
Meanwhile, in the UK, AltFi platforms have an opportunity to take advantage of new Open Banking regulations, which allow licensed finance firms to access (with permission) customer account information from the ten largest banks. This will potentially help AltFi platforms to develop new services and offers for businesses seeking funds.
Alternative Finance is now part of the mainstream, but we should expect surprises and new developments in the year ahead.
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