Alternative finance: Opportunities and risks 

Here's how alternative finance has stepped up to help companies get the funding they need.

SMEs are an enormous driver of the economy, yet have been consistently denied funding or underfunded by banks over the last decade.

A lot of tech development has been devoted to helping SMEs be more productive, work collaboratively, and manage resources, but even the savviest company sometimes just needs capital to grow or improve infrastructure.

Alternative finance considerations

Enter alternative finance, which has stepped into the breach to help companies get the funding they need to grow and thrive.

Some recent data is striking: Crowdfund Insider reports that since 2011, banks have withdrawn overdrafts from SMEs at the rate of more than £5 million a day, and that the ‘number of approved overdraft applications has fallen by 47 percent since 2012’.

According to the Bank of England, lending began to pick up again in 2015, after contracting for several years, but it’s not as if the floodgates have opened, with many loan requests not being fully funded.

By contrast, alternative finance as a whole, including peer-to-peer and peer-to-business lending, crowdfunding, and other products, has more than doubled just since 2014.

Considering that the British Business Bank reports that only 40 percent of small businesses are even aware of peer-to-peer lending, there is more opportunity out there for both lenders and borrowers.

Donation, or reward-based crowdfunding has grown at an astonishing pace, but this is not likely to be the ideal source for a mid-sized firm that needs to revamp its server infrastructure.

Such companies would do better to look into crowdlending platforms such as ArchOver or Funding Circle.

Small firms might benefit from invoice financing, monies borrowed against the value of outstanding invoices. This has gained popularity among UK businesses as a way to secure cash flow and meet payments.

Alternative finance landscape

The landscape is still untamed, though, and there are risks afoot. A recently released report, called Pushing Boundaries, by the University of Cambridge’s Judge Business School, in conjunction with innovation charity Nesta, states that 2016 is the year that ‘alternative finance’ will become mainstream, as more institutional investors and traditional banks come up with their own ways of participating.

For example, the British Business Bank is a Funding Circle investor.

The report highlights a few areas of concern, one being the sheer number of platforms entering this space.

The market is now at £3.2 billion with a dizzying array of sources and options, from equity-based funding for real estate down to invoice finance.

Two of the report’s authors say that ‘there are simply too many to be economic’ and that the inevitable failures could put the market at risk.

Regulation and good behaviour will be important factors in the survival of alternative finance. Pushing Boundaries reports that the industry feels it is regulated enough, unsurprising when there’s money to be made by lenders, but it does seem that lessons have been learned since the exposures of bank malfeasance in 2008.

Some 57 per cent of platform providers surveyed for the report say that the biggest risk to the growth of this market is ‘the potential of a collapse of one or more of the well-known platforms due to malpractice’.

Further reading on alternative finance

Looking for finance? SmallBusiness.co.uk is working in partnership with trusted lenders to help you find the best business funding deals. Find out more here.

Ben Lobel

Ben Lobel

Ben Lobel was the editor of SmallBusiness.co.uk from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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