‘Alternative Finance’ (Alt-Fi) is a term used to describe non–mainstream funding models that have emerged outside of the traditional financial system following the 2008 crash. The financial impact of the crash meant that tighter restrictions were placed on banks, capital adequacies and deleveraging. This caused heightened risk aversion and led to the credit squeeze, leaving the SME sector embarrassingly underserved. The response to scarce bank lending was the emergence of Alt-Fi such as crowd funding, peer to peer lending and invoice trading.
Since 2008, growth in Alt-Fi has been spectacular and is projected to hit around £12.3bn by 2020. This momentum is clearly backed by UK Government support, with the British Business Bank so far investing over £60m in the sector to facilitate SME lending. There are over 5m SMES of which 1m are always looking for funding. Yet 70% of SMES are currently turned down for business and 40% don’t go elsewhere.
Further Governmental support was evidenced when new legislation came into play in November 2016 obliging banks to refer declines to Alt-Fi providers. This was a big step in Alt-Fi being accepted as a complementary offering to traditional funding. The beat of the Alt-Fi drum just got a great deal louder. There is now a mechanism in place to obtain access to the myriad of competing business finance options and one which provides greater awareness and all-important education to SMEs. There is also the issue of validation: compelling banks to refer is a testament to the quality of the participants in the Alt-Fi market.
Though some banking stalwarts still see Alt-Fi as a threat, banks are starting to get into the space which is a sign that is becoming more mainstream. In fact, Alt-Fi is now seen as first choice for many entrepreneurs because it can be cheaper and faster than traditional debt and equity arrangements.
Alt-Fi lenders offer a wide and diverse range of financial solutions, frequently using technology and data to make lending decisions, typically via online platforms, with a seamless customer experience and in a fraction of the time it takes traditional lenders to arrive at a decision. The speed, flexibility and transparency of Alt-Fi successfully remove the layers of legacy cost that come from maintaining the outdated infrastructure of local bank branches and call centres. Banks are an expensive way of channelling liquidity from one place to another. The agility and responsiveness of Alt-Fi really challenge the slow reaction times of traditional banking - the “oil tanker turning around in the ocean” analogy springs to mind. Over-regulation in traditional banking also penalizes the SME sector as it is categorised as higher risk.
Although growth has been impressive (the Alt-Fi market is now worth around £3.2bn) this is still tiny in the scheme of overall bank SME lending and this sector has not been exempt from the current economic uncertainty with Peer to Peer (P2P) loan origination falling consecutively in recent months caused by fears over Brexit and investor uncertainty.
To keep growing, the Alt-Fi market must continue to build trust and greater awareness and through regulation this will attract both greater levels of investors and SMEs requiring funding. Initiatives to promote Alt-Fi options through such things as the Bank Referral scheme will continue to push the market deeper into the public spotlight. The launch of the Innovative Finance ISA now introduces P2P up against more traditional savings products. Only 26% of P2P business loans are funded by institutional capital which opens up tremendous opportunities, provided that the Alt-Fi industry complies with the ISA’s investment criteria – the need for transparency and confidence.
Al-Fi must also continually innovate to stay ahead of traditional lending. Business owners are now of a newer generation (millennials) and act more like consumers, going online, reading blogs and sharing experiences and behaviours across social media. A greater use of technology will continue to bring an ever increasing range of refreshing funding options.
Attracting a greater level of institutional investment is key to scaling the Al-Fi market and fundamental in determining its ability to continue to attack the SME credit gap. Alt-Fi has reached a crucial stage: EVOLUTION NOT REVOLUTION!
If you would like to find out about alternative funding solutions for your business, contact Ian Ward of Breathe Cashflow. Call Ian on 0118 9832836 or email at firstname.lastname@example.org.
Breathe Cashflow is a modern and vibrant consultative-led business based in the Thames Valley that facilitates smarter, innovative and altogether more flexible cashflow funding solutions to meet the needs of today's discerning SMEs. Visit Breathe Cashflow at www.breathecashflow.co.uk for more information.