The alternative finance industry has quickly become a key part of the UK economy by using an innovative , technology-led approach to simplify the links between those who want to invest money and those who want to raise finance.
Alternative finance is making a difference to small and medium sized businesses by increasing the financing options available to them. The data below shows that the average amount of funds raised is still small (typically under £100,000) but larger amounts have been raised and awareness is growing all the time.
Crowdfunding and peer to peer finance are at the vanguard of the movement, but various options exist. 44% of SMEs say they are familiar with alternative finance, but only 9% have used or tried to use it.
Commentators have warned against the viability of some alternative finance sources, particularly given the relative lack of regulation when compared to traditional counterparts.
Alternative finance is in its infancy and a lack of a track record is leading some industry experts to question its merits. This is most true of equity crowdfunding, where there has been a distinct lack of successful investor exits. Indeed, there have been some very high profile failures, such as the Zano Drone, which initially raised funds on the Kickstarter platform.
Despite this, Alternative Finance is becoming more popular with start-ups and pre-revenue businesses, which would otherwise find it difficult to attract the investment required to get their ideas off the ground.
This is currently the largest and most popular form of alternative finance, which is directly challenging the SME banking market. P2P loans consist of debt transactions between a number of individuals and an existing business. Online investors provide loans directly to the business, whilst bypassing the bank lending process. The loans can be secured or unsecured.
Mainly used by early-stage firms, equity-based crowdfunding involves the sale of shares to numerous investors. The fastest growing option, equity based crowdfunding has seen a 410% increase, reaching a total volume of £84million between 2012-2014.
Individual and/or institutional investors buy a firm's invoices at a discounted rate, in return for working capital. By doing so, investors receive their funds immediately instead of waiting for invoices to be paid. This is a direct replacement for traditional invoice financing from a bank.
Mainly used by SME business owners and directors, who are able to invest their accumulated pension funds into their own business.
Debt-based securities provide a long term investment model (typically 10-25 years), based on a non collateralised debt obligation and is similar in structure to a bond. This option has seen a 117% in growth since 2012, but volumes are still relatively low reaching £4.4 million in the UK.
Individuals using an online platform to borrow from a number of individual lenders each lending a small amount; most are unsecured personal loans.
The term community shares refers to withdrawable share capital; a form of share capital unique to co-operative and community benefit legislation. This type of share capital can only be issued by co-operative societies, community benefit societies and charitable community benefit societies.
Donations are made to a defined project by individual backers, who in turn expect a material, tangible but non-financial reward or product in exchange for their contribution.
Similar to reward-based crowdfunding where defined charitable project benefits from donations made by individuals, but no financial return is received in exchange, making it more akin to a normal charitable donation.
The following chart illustrates the volume raised in £millions, and the average growth rate for each alternative finance option for the period 2012-2014.
The most attractive feature of alternative finance is its simplicity and the ability to quickly compare competing providers.