Alternative Business Finance: what’s the state of play?

UK Business Finance - the British countryside

Alternative Business Finance: what’s the state of play?

The alternative business finance industry has witnessed incredible growth over the past few years. The UK now dominates the European alternative finance landscape, increasing its market share to 81% in 2015. Here we look at the reasons for this continued growth, the opportunities and challenges, and what could be next for the industry.

The need continues…

UK businesses are using alternative finance products more than ever for a wide range of positive reasons. Alternative finance products tend to have efficient application processes, flexible repayment terms and there are a diverse range of available products. The competition within the industry also compels lenders to be highly attuned to the evolving needs of modern businesses, which all helps create mature finance products.  Also, improvements in access to data and verification techniques, as well as an increasingly supportive regulatory frameworks are benefiting alternative business finance customers in a big way.

The Federation of Small Business said in 2016: “There are welcome signs that small businesses are increasingly using alternative finance as a way of raising capital.”

Despite banks lending over £50bn to SMEs in 2015, there is still an annual £1bn funding gap that is inhibiting business growth in the UK. A key driver for the rise of alternative business finance has been a restriction on mainstream business lending. £5m worth of SME overdrafts have been reduced every day since 2011.  Indeed, 31% of SME owners said that being unable to secure finance with a mainstream lender has caused them to lose out on a deal or investment opportunity.

Opportunities and challenges

Although all the figures, including, the Small Business Finance Markets Report 2015/16 show that the market for business finance is improving, a number of opportunities and challenges remain.

“It’s been a phenomenal and record-breaking year across the commercial finance sector”, according to Adam Tyler, chief executive of the NACFB. Yet over the last 12 months there has been a slight decline in certain types of lending, namely P2P lenders, pension and cash flow funders.

However, lenders are not phased by this small dip in growth trajectory and most lenders agree that confidence in the alternative business finance market remains high. The meteoric rise of peer-to-peer lending has been blamed for skewing the data, and the growth forecasts for the wider alternative lending market remains on track.

Open Banking

In 2016, the Competition and Markets Authority (CMA) mandated the adoption of Open Banking by early 2018. The improved market and data access that this open banking initiative will give means there is a huge potential for alternative finance companies to create new business models, applications and interfaces. Open banking could be the biggest boost to commercial finance for small businesses in many years.

According to Conrad Ford, CEO of Funding Options, data from Open Banking APIs will “add rocket fuel to innovative fintech firms like alternative finance providers”.

Increasing trust

British Business Bank statistics show that a quarter of UK SMEs are now aware of who to approach for Trade Finance solutions. This more than doubles the figure from 2012. However, a significant gap in SME knowledge about the range of alternative business finance options available remains.

Adam Tyler puts it like this: “There has never been a better time for businesses to secure finance, as the commercial finance sector continues to innovate and diversify. The challenge is to make sure the message reaches SMEs that there are many routes to funding.”

Beyond simple awareness and knowledge, SMEs also must have trust alternative lenders. The more established the market becomes, the higher this level of trust will become.

Government support

The alternative business finance sector has seen increased support from the Government. This support often comes in the form of organisations that promote financial reform (e.g. Finance Innovation Lab and Move Your Money). This is crucial to the moral framework of the industry.

A key development for the industry is The Small Business, Enterprise and Employment Act 2016.” Having the Government put their stamp of approval on specific lending platforms will go a long way to improving awareness for alternative business finance.

There have also been many local government collaborations including the Greater Manchester Combined Authority who put £2m into MarketInvoice. This collaboration is to help the region’s small businesses with cash flow issues.

Looking forward

Non-alternative alternatives

It would seem that the future relationship between mainstream and alternative finance is evolving. Many alternative finance companies are seeking funding deals with mainstream institutions. Either alongside or separate from individual ‘retail investors’.

Ross Cocker, corporate finance partner at accountancy firm Clement Keys noted the integration of banks with alternative lenders with the aim to providing a customer-focused finance solution:

“While an increasing number of SMEs are using alternative lenders for small loans, banks are by no means out of the picture. Many are demonstrating that they are willing to complement this activity by providing additional funding and taking on a proportion of the investment risk”.

There are many examples of business banks working in partnership with alternative business finance providers. Pay4 works in partnership with Santander for instance.

Global expansion

Globally, another $2.38 trillion in demand for credit exists, based on IFC data. Innovative business models seen in emerging markets first may spread to the rest of the world over subsequent years. This of course relies upon several enabling factors: availability of data, supportive regulation, enough investor capital, and financial education, among others.

Growing new markets in a sustainable manner through a balance of innovation and regulation is the key challenge for an industry on the cusp of world domination.

Alternative Business Finance: what's the state of play?