2017: the year alternative finance takes centre stage
April 2017 | EXPERT BRIEFING | BANKING & FINANCE
It is undeniable that the alternative finance sector has enjoyed significant growth over the past few years. However, up to this point, the industry has been prevented from taking centre stage by limited secured lending options, a lack of offerings that are tailored to specific businesses, and restricted conversations around what alternative finance is and its benefits. This year, a boom in the number of new and young businesses, a rise in financial instability, and each of the aforementioned factors being turned on their head, will usher in the year of alternative finance.
Economic uncertainty, despite its highly negative, face value connotations, has been demonstrated to positively stimulate the financial services industry. The rise of the alternative finance sector, in the wake of the credit crunch, is a prime example of this. The fluctuating credit supply led to constricted interest rates, and in turn a crackdown on lending by banks. With this in mind, we can logically infer that Brexit, with its unquestionable impact on the UK’s financial stability, will mean banks introduce more stringent lending criteria to ensure they get safe returns on their loans.
New and young businesses are prime examples of those which will struggle to secure traditional loans, as banks seek to protect their profits. There are several reasons for this. Firstly, the amounts they require are typically too small to earn banks a ‘worthwhile’ profit. Secondly, they do not have developed lines of credit, owing to their status as new companies, meaning banks can claim they have no evidence that they are financially responsible. Unable to follow traditional avenues these businesses will turn to alternative options to meet their financial needs. This process is already in action – over half of all investment in startups, ‘scaleups’ and small businesses over the past year came from alternative sources. As the number of new and developing businesses grows alongside these adoption figures this year, alternative finance will become increasingly pre-eminent.
Despite the misconception among some that alternative finance is something resorted to following a bank loan rejection, our understanding of what it is has meant we have come to recognise it as a valid first choice. As knowledge and trust around the concept have grown, it is particularly noticeable how various types of businesses have begun to demand alternative finance solutions to meet their specialised needs. These offerings have, in fact, been in the pipeline for a number of years, and now a significant number, having been approved by the Financial Conduct Authority (FCA), are being released onto the market. With a recent influx of tailored options and choice, uptake by new borrowers will undoubtedly increase and alternative finance will no longer be considered a solution only for those not deemed creditworthy by banks.
The introduction of new offerings into the market will also help aid the perception of alternative finance as a reliable, quick, flexible and painless answer to short term financing needs. This message will resonate with the growing number of young, small scale businesses. Such is the nature of running a start-up or small enterprise, business owners regularly face unexpected challenges (funding for new office spaces, or cushioning for changes in their business environment) that require a quick financial resolution. Without financial help, the progression of the business would be stunted by waiting up to (or over in some cases) six months for a bank loan. By contrast, applying for a bridging loan would see a business have access to the money in as little as seven to 10 days. Bridging provides quick security, rather than there being a lengthy investigation into the borrower’s credit history.
As businesses read more about alternative finance offerings, it will become increasingly apparent that that you do not just gain a loan from them, but a relationship. Startups may know how to raise funding, but the ability to identify a deal – and how to underwrite them – may elude them. When a non-traditional lender partners with this kind of business, they do not just invest money; they also invest in the company’s future success, and will nurture it in a way that banks do not have the resources to do, through a truly personal service. This connection also often means greater flexibility in repayment plans and a more enjoyable experience overall. Several lenders offer creative options, such as small daily repayments that can be tweaked in accordance with the borrower’s sales volume, allowing them to pay back what they owe in a manner that will not jeopardise their short term stability.
This year’s alternative finance boom will not just be attractive to prospective borrowers, but the lenders themselves. Over the last few years we have seen a growing number of peer to peer lenders. Previously all of these were unsecured, and as such they were only able to offer investors 4 to 10 percent of the return annually. Now, secured options are able to deliver substantial returns of anywhere from 10 to 12 percent.
Ultimately, 2017 will see a pullback in lending by banks and more options enter the market, resulting in uptake by new lenders, and adoption by a broader range of businesses than we have seen before. But what will ultimately make non-traditional financing a particularly attractive proposition this year is that we will see a lot more noise around the topic and a greater understanding of the benefits, as we see more and more success stories. Over the next 12 months we will see alternative finance become commonplace, which leads us to question whether options such as bridging can even be considered as ‘alternative’ anymore.
Rajiv Nathwani is the founder and director of Quivira Capital. He can be contacted on +44 (0) 20 3051 5298 or by email: firstname.lastname@example.org.
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