Alternative Finance UK

A Vibrant Alternative Finance Landscape from the helicopter view of London

A Vibrant Alternative Finance Landscape from the helicopter view of London

56% of UK SMEs are still unfamiliar with any form of alternative finance. The recent rise of Alternative Finance Institutions (AltFI) introduced them as a serious competitor to traditional finance organisations. AltFI’s representatives are fintech company, a challenger bank or a retailer financial institution.

In order to understand alternative finance we need to define what is SME finance? This concept that is related with all ways of financing a SME is the process or various forms of funding small and medium-sized enterprises, also known as trade finance that includes: trade and Stock finance, asset backed finance, invoice finance, venture capital finance, business loans, property finance, import and export finance, vehicle finance. To top to this there is as well peer to peer finance, crowd funding and

SME finance represents a major and critical function of the general business finance market – in which capital for different types of firms are supplied, acquired, and costed or priced. SME finance an activity historically associated with banks has been replaced very rapidly in the last years by alternative finance, a similar offer provided this time not by big major banks of financial organisations but by new independent fintech companies. Nevertheless this new offer and dynamic area of business, finance and tech is still in its early days and suffers an ignorance by most of the SME leaders that are struggling to cope with a very fast moving digital and fintech disruptive world.

To visualise this last part statistics by the UK government shows that 9% of UK SMEs who were familiar with at least one form of alternative finance stated not having enough knowledge about alternative finance platforms as the main reason for not using them.

Mark James and Fergus Lemon, PwC  in a report done by NESTA, and the University of Cambridge, supported by ACCA and PWC for 2014 https://www.nesta.org.uk/sites/default/files/understanding-alternative-finance-2014.pdf stated that:

The alternative finance industry is quickly becoming an important part of the UK economy. The innovative, technology led approach has improved access to finance for SMEs and seems to be having a positive impact on social and charitable enterprises. We are therefore delighted to be supporting what in our view is the most comprehensive research on the industry to date.

So what are the the forms of alternative finance in the Uk and the top platforms for each form to help SMEs find platforms right for them?

The top forms are:

Asset based Finance,
Recruitment finance,
Secured Business Loans,
Trade Finance,
Government Loans,
Invoice finance,
Property Loans,
Merchant cash advance,
Overdraft facility,
Construction finance,
Revolving credit facility,
Peer to Peer financing,
Crowdfunding,
Unsecured business loans,
Pension based finance,
Transportation finance.

The concept of alternative finance, in this case mostly for business is in fact an umbrella term that covers a range of very different finance models from people lending money to each other or to businesses, to people donating to community projects and businesses trading their invoices or other forms of cash flow directly related with daily functions and funding / loans models.

The fundamental distinctions between these financial models are important as they differ enormously in the types of people and organisations that use them, why they use them and the nature, form and amount of financial transactions, regulation and processes that take place.

Alternative finance is pushing boundaries and is associated with the best of innovative disruption as it brings positive change and solutions for business problems.

Of course the process of pushing innovative boundaries, created tension in big financial organisations and corporations and sometimes highlight credibility and trust at risk. Nevertheless the growth of the industry to date attests to the trust placed in platforms by many funders, fundraisers, policy makers and the general business drivers and public.

The tests of the trust that alternative finance and trade finance new drivers are to come, and the outcomes are now shaping the industry as it shows a fast growing trajectory and institutional bigger and bigger relevance within the financial system as a whole.

Tellingly, the alternative finance and trade finance platforms themselves recognise that the greatest risks to the continued growth and development of a very recent industry that has redesigned industries and organisations in the last centuries are not increased regulation or changes to tax incentives, but the build of a system of respect and the risks associated to all the events related to their own disruptive conduct: malpractice, tentatives of trying to go too fast or the ever concerning critical scenarios of cyber security breach and other related scenarios.

Having said this the Alternative finance and trade finance industries are creating a solid ecosystem that of well nurtured will continue increasingly helping SMEs and startups and creating creative solutions for old problems and blocking processes.

The bellow graphic highlights some of the most interesting innovative alternative finance areas and concepts:

Alternative Finance definitions and overview infograhic by NESTA

Alternative Finance definitions and overview infograhic by NESTA

Another research “Pushing Boundaries The 2015 UK Alternative Finance Industry Report published by the Cambridge Centre for Alternative Finance at the University of Cambridge, and UK innovation foundation Nesta, in partnership with KPMG and with the support of CME Group Foundation released in February 2016, conducted by Bryan Zhang, Peter Baeck, Tania Ziegler, Jonathan Bone and Kieran Garvey, stated that in 2015 the UK online alternative finance sector grew 84%, facilitating £3.2 billion in investments, loans and donations.

You can see the source here: http://www.nesta.org.uk/publications/pushing-boundaries-2015-uk-alternative-finance-industry-report#sthash.KX3WBrGj.dpuf

Other numbers from the report show and highlighted that:

  1. In 2015, the alternative finance market grew to an impressive number of £3.2 billion. And the fantastic fact is that the market is taking an increasing share of small business lending and start-up investment.
  2. Alternative finance business lending is 12% of the market for lending to small businesses in the UK. Equity crowdfunding is 15.6% of total UK seed and venture-stage equity investment. The fastest growing models in 2015 were donation-based (grew by 500% since 2014 to £12 million) and equity-based crowdfunding (grew by 295% since 2014 to £332 million).
  3. The market saw increased involvement from institutional investors: 45% of all platforms reported some level of institutional involvement. Real estate is the single most popular sector: the combined debt and equity-based funding for real estate amounted to almost £700 million in 2015.

On a more industry and focused overview the bellow more updated infographics gives a complement to the report and extra fantastic overview of the size and solid alternative finance / trade finance market, highlighting some of the top companies and the business size both for 2015, 2016 and 2017 and 2018:

UK alternative finance - 2015 infographic by Fundbird

UK alternative finance – 2015 infographic by Fundbird

UK alternative finance - 2015 infographic by Fundbird

UK alternative finance – and UK Market size 2015 infographic by Fundbird