The Growth of Britain’s Alternative Finance
Britain’s alternative finance namely crowdfunding still continues to grow despite the challenges, simply because:
• Businesses, usually medium or small and hungry for capital seek to raise funds from a great number of investors referred to as ‘the crowd’. This means instead of going to the bank for a large amount of loan, companies open it up to anyone to seek and get the money they need through a group of investors.
• For start-ups, alternative finance gives them the chance to finance their businesses without having to go to high-street lenders, which they may not be qualified for. The founder of Satago, Steven Renwick says crowdfunding let him approach his friends “who could spare a few hundred pounds” and get the ball rolling on a funding round that reached £30,000.
• Equity-based crowdfunding, which is one of the three main areas of alternative finance which have flourished in the previous years, is essential to improving the ‘equity economy’ and giving more people a stake in Britain’s entrepreneurial scene.
• Crowdfunding is not only a way to raise money, it can also be an exceptional way to launch with a big splash or build a closer relationships with your customers.
• Crowdfunding is expected to become more business-focused as it gets the attention of most investors. As the pool of money being poured into crowdfunding surges during this year and 2017, we should expect the sector to become more business-focused. For example, medical practitioners and scientists investing in medtech firms, or engineers and estate agents buying up shares in real estate firms.
The Growth of Britain’s Alternative Finance – Peer to Peer Lending
While alternative finance is booming in the UK, the concern about the risks of peer-to-peer lending is also becoming more profound. Lord Turner, at the time, head of the Financial Services Authority (now FCA), said: “The losses which will emerge from peer-to-peer lending over the next five to ten years will make the bankers look like lending geniuses.”
The three main areas of alternative finance which have flourished in the previous years:
1. Peer-to-peer lending, the simplest of the three, is an alternative finance type where individuals lend money straight to a group of individuals and businesses through an online platform, such as RateSetter, which recently passed £1bn in total lending.
2. The second area is the reward-based crowdfunding which accounted for a slim £42m of the alternative finance market last year. In this type of crowdfunding, businesses, usually in the earliest stages of their life, ask ‘the crowd’ for money to get their projects off the ground. In return, investors receive ‘rewards’ if the product or project gets made.
3. Equity-based crowdfunding has the most potential to transform a business landscape. It sees individuals invest directly in companies in return for a stake in the business. Investors have the freedom to pick the companies they like themselves and invest. Alternatively, they use aggregator funds to spread investments across several companies.
In the previous year, there were more new businesses started than ever before. The spirit of entrepreneurialism has never been alive than it is in Britain today. Evidently, there is a hunger for a new way of investing.
Platforms have been doing a great job at drawing the interest of new customers and of launching themselves as a reliable source of finance for businesses. Now they need to ensure they are putting as much effort into explaining the possible risks to customers who may have little, or no, prior investing experience.
If we look through the risks, put our confidence in the platforms and believe they could get it right, as they have done so far, then 2016 could be the year when crowdfunding and peer to peer lending really takes off.
Why not take a look at our P2P business and also check out the FAQ’s section which is just of the many different markets and niche areas around offering alternative finance for borrowers and of course better potential returns for investors.