INTO THE BREACH
Alternative financing platforms such as crowdfunding, peer-to-peer lending and finance matchmaking offer hope to the UK’s cash-strapped SMEs, a recent ACCA event reported
xpectations are growing that alternative finance providers can step into the gap left by mainstream lenders when it comes to funding the UK’s smaller businesses. Since the 2012 Breedon Taskforce identified a potential £59bn funding gap for SMEs up until 2016, alternative finance providers have built up considerable momentum. The market need is clear and the technology solutions are readily to hand. Uncertainies remain, however, over regulatory issues. Alternative finance might not have a long history, but it doesn’t entirely lack a track record. As she introduced ACCA’s first Alternative Finance Conference last month, ACCA chief executive Helen Brand said that the UK now arguably leads innovation in the sector globally, although it was the US that pioneered the development of a viable alternative finance market. ‘2013 can and should be the year that crowdfunding and peer-to-peer finance come of age, as properly regulated services serving mainstream business,’ she said. ‘Despite the sluggish recovery, alternative providers are still benefiting from what in some ways is a very benign climate: widespread mistrust of the banks and the financial system, rock-bottom interest rates, substantial interest from venture capitalists and now government support, too. It cannot always be this way and the incumbents know this. In the long term, competition is going to be fierce.’ The keynote speaker at the event was Jo Swinson MP, minister for employment relations and consumer
affairs in the Department for Business, Innovation and Skills. She said that the government is keen to act as a catalyst and encourage innovation among alternative finance providers, while also ensuring protection for the public. ‘The Financial Conduct Authority welcomes changes that mean members of the public can become lenders as well as borrowers. There is huge potential
Report – these have exerted pressure at a time when banks are trying to recover. All of this has led to a tightening of terms, more collateral and security, which hits SMEs, in part because they tend to be asset-light.’ The UK was ready for take-off in terms of its adoption of alternative funding, he said. ‘The UK is unusually advanced in its take-up of comparison
‘ALTERNATIVE FINANCE DEMOCRATISES FUNDING FOR SMALL BUSINESSES’ here, but regulation is not the only key to growth. It will also be down to whether the lenders build a service that is valued by investors and businesses.’ Indeed, the government has moved to support these new channels for SME finance. Through the Business Finance Partnership scheme, it has put £100m towards alternative business finance providers, including £30m for online peer-to-peer lending platforms. In the latest round of this funding, invoice finance platform Market Invoice received £5m towards meeting working capital needs in the SME sector.
Market snapshot So what does the provider market look like and how has it developed in the UK? Andy Davis, former FT journalist and author of Seeds of Change: Emerging Sources of Non-Bank Funding for Britain’s SMEs (Centre for the Study of Financial Innovation, 2012), said at the event that the conditions that enabled alternative finance to develop are clear. ‘An over-consolidated banking system forced to retrench; re-regulation in the form of Basel III and the Vickers
websites, insurance sites and so on. The websites of alternative funding platforms make rapid decisions, and the style and tone of content on the websites indicate a more approachable breed of organisation.’ The key advantage for businesses is that it enables them to diversify financing risk. In the autumn of 2008, owner-managers discovered the risks inherent in single-bank relationships, Davis argued. Other advantages include speedy decisions in days not months; much greater flexibility around terms; a relationship that doesn’t lock the borrower in; guarantees that are less onerous; and competitive rates available to armchair lenders. ‘It democratises funding for small businesses,’ said Davis. Simon Deane-Johns, solicitor at Keystone Law and formerly general counsel and company secretary at peer-to-peer finance marketplace Zopa, pointed out that alternative finance is not really driven by the recession. Zopa was established in 2005 during a credit boom, when spreads between savings and loans were very narrow.