Understanding Alternative Finance
December 05, 2014
The alternative finance industry is quickly becoming an important part of the UK economy. An innovative, technology led approach by many in the sector has improved access to finance for SMEs and it seems to be having a positive impact on social and charitable enterprises. We are therefore delighted to be supporting Nesta and the University of Cambridge's UK Alternative Finance Industry Report 2014: in our view the most comprehensive research on the industry to date.
The report by Nesta and the University of Cambridge (supported by PwC), UK Alternative Finance Industry Report 2014, estimates £1.7bn will be lent or invested through alternative finance platforms this year, up from £0.7bn in 2013. This takes the cumulative total (2012:2014E) to around £2.7bn. Loans to businesses account for about £750m (up 288% yoy); loans to consumers £547m (up 91% yoy) and invoice trading £270m (179% yoy). Equity crowdfunding is growing rapidly but is still much smaller with estimated funding in 2014 at £84m (201% yoy).
Whilst the alternative finance industry is growing strongly, awareness and uptake amongst consumers and SMEs is still relatively low.
From acorns to oak trees?
Of the 2,000 consumers surveyed, over half (58%) were aware of alternative finance in one form or another yet just 14% had used it as a means of lending or investing money. Around 60% of all respondents stated that they would be unlikely or very unlikely to begin to or continue to use alternative finance platforms, with risk and security the most common concerns cited. This may change with time in the short term as the industry matures and consumers are better informed. However, it endorses our view that the greater proportion of funding is likely to come from institutions. On the demand side there was a similar story - 44% of SMEs surveyed were aware of alternative finance in one form or another, but fewer than 10% had approached a platform for funds.
The growth in the UK alternative finance market is also being combined with expansion overseas, with a number of cross-border M&A deals taking place in the second half of 2014. Recent examples of UK platforms expanding overseas include Seedrs' acquisition of Junction Investments in the United States and Funding Circle's acquisition of LeapPay also in the US. Scale is all important to these platform based business models and we expect to see much more activity over the next 12-18 months. We will also see mainstream banks moving into the sector as a route to market.
Finally, there may also be deals on the horizon in other sectors - what we find fascinating is that the alternative finance industry is already innovating into new sub-sectors (e.g. real estate) and there may be well be demand for more. Whilst the majority of respondents, in the aforementioned consumer survey, said they would not consider peer to peer (P2P) or crowdsourced activities for other services or products, 18% said that they would consider it for exchanging currency, 11% for insurance and 10% for mortgages.
There was also good news for P2P lending in the Autumn Statement, which announced a number of measures to support the growth of the industry. They include a new bad debt relief for lending through P2P platforms; a consultation on whether to extend ISA eligibility to lenders using crowdfunded, debt-based securities and an intention to review financial regulation which currently stands in the way of institutional lending through P2P platforms.
What’s been your experience of alternative finance? Is it a viable alternative to traditional sources? Share your thoughts and comments below or schedule a meeting if you would like to discuss your situation in confidence.