Market Overview – the alternative finance market continues to grow rapidly
The state of the alternative finance market
In 2014, the total amount raised through various alternative finance models is on track to more than double compared to 2013. In the first three quarters of 2014, alternative finance platforms facilitated loans, investments and donations worth £1.2 billion, with platforms predicting3 the amount to reach £1.74 billion by the end of the year.
As described earlier, alternative finance is an umbrella term covering a very diverse market containing different models. Looking across the different models of alternative finance, most grew substantially in 2014. On volume of funding facilitated, peer–to–peer (P2P) business lending and P2P consumer lending continue to dominate the market with £749 million and £547 million lent through those models respectively in 2014.
Invoice trading, is expected to grow to a £270 million sector by the end of the year, up by 179 per cent from 2013. Equity–based crowdfunding is on track to grow to £84 million – a 201 per cent increase from 2013, whilst reward and donation–based crowdfunding are expected to reach £24 million and £2 million in the same period. Finally, debt–based securities, pension–led funding and community shares are expected to register £4.4 million, £25 million and £34 million respectively by the end of 2014.
To put industry figures into context, in the first three quarters of 2014, the UK P2P consumer lending platforms had provided consumer credit to more than 62,000 individual borrowers in the UK. By the end of the year, it is expected that the UK alternative finance market will also provide over £1 billion worth of business finance to over 7,000 SMEs,4 equivalent to 2.4 per cent of cross national bank lending to SMEs based on Bank of England’s 2013 baseline figures (Trends in Lending, October 2014).
Market likely to continue its growth in 2015
Looking at growth figures from the past three years, we project that the UK alternative finance market will grow to around £4.4 billion in 20155 if current growth remain buoyant. There are a number of factors that suggest growth will continue apace. Firstly, when asked, current users of UK alternative platforms indicate that they are very likely to use alternative finance models more in the future. More than half of P2P business lenders for example, plan to lend more in the coming year than last year. On the borrower side, 86 per cent say they would be ‘likely’ or ‘very likely’ to approach alternative finance platforms first in the future even if a bank were to offer funding on similar terms.
The second factor that indicates significant potential for future growth, is that awareness and usage of alternative finance in the UK is quite low. Forty–two per cent of individuals participating in a national survey were completely unaware of any type of alternative financing activities or platforms. Even more promising for the growth potential of the market is that just 14 per cent of the respondents in the same survey had used an alternative finance platform, leaving significant scope for expansion. Looking at potential fundraisers, there are also indications of the potential for future growth. While 44 per cent of SME’s surveyed were familiar with some form of alternative finance, less than 10 per cent had approached an alternative platform to seek finance.
However, alternative finance platforms also have significant challenges ahead, as, despite the positive perceptions their users have of the industry, those who have not used it remain skeptical. Sixty per cent of surveyed consumers said they are ‘unlikely’ or ‘very unlikely’ to begin/continue using alternative finance platforms, citing concerns about perceived risks and a lack of information about those individuals and businesses that they would be funding. There was also a perception that their money would be safer with traditional financial institutions rather than with alternative finance providers.