If alternative finance went mainstream in 2015, then 2016 should be the year for the sector to authenticate itself as a bank’s competitor in providing funding for small businesses. The sector has every reason and capacity to assume this role considering the control that the UK’s biggest banks still have over customers, even with the recent emergence of numerous new banking services focused on small companies.
According to Liberum AltFi Volume Index data, business lending originations from crowdfunding platforms in UK last year reached £1.26 billion, an increase of about 75 percent from 2014. Companies raised an additional £333 million from online invoice financing, about a 32 percent increase from 2014; and £125 million was raised via equity crowdfunding, a 134 percent increase from 2014. The data shows how rapid the UK’s alternative finance sector is growing. However, the big question now is how quick AltFi providers can capitalize on this solid base.
The launch of Innovative Finance Individual Savings Account (IFISA) in April 6 will undoubtedly boost the AltFi sector. Starting April 6, investors providing loans which do not exceed £15,000 annually to small businesses via crowdfunding platforms will enjoy tax-free interest.
The government’s plan to legislate the referrals scheme will also help. With this, banks that disapprove any small business loan application will be required to refer it to alternative finance providers where they can find substitute ways of funding.
Several alternative finance providers are expected to launch various programs this year, which will make the sector be taken more seriously. For example, leading lenders such as LendInvest, Funding Circle and Zopa are expected to launch their IPOs initiatives this year.
However, there are several hurdles that must be overcome. For example, there are pending issues with the final copy of the Innovative Finance Isa, such as the omission of equity investments. There is also the problem of the referrals scheme taking too long. Stakeholders in AltFi sector are mostly worried about authorization, since most of them operate under interim permission given by regulators.
Green & Smart, a renewable energy firm that produces energy from palm oil wastage, is planning to launch its IPO on Alternative Investment Market (AIM), London Stock Exchange’s sub-market. This will help raise the required capital to implement current projects, while developing new projects, in a sector whose investors are protected by the governments’ legislations.
New data shows that money owed to UK small businesses from late payments have reached £255 billion. According to the insurer Zurich, many businesses are at the risk of financial ruin due to late payments.
Therefore small businesses need quick access to capital and support from the government to face some of the challenges threatening their viability in an uncertain economic climate. This gives alternative finance the opportunity to stop being alternative and become a real competitor to banks.