Alternative finance is out there and making headway fast. We have already seen alternative finance forms such as crowdfunding and peer-to-peer lending making considerable progress in helping people to achieve their financial goals. As Peter Baeck, Liam Collins and Brian Zhang point out in a recent report published by Nesta: “Say financial innovation and what comes to mind for many is the investment banks… that were at the centre of the financial crisis. Yet in recent times we’ve seen the term become associated with a new type of finance provider…”
This very innovative report tried to give answer to the following questions:
- What type of people and organisations use the different alternative finance models ?
- Why do people and organisations seeking money turn to alternative finance platforms?
- What makes the model attractive to people with money to donate, lend or invest
- What is the socio–economic impact of alternative finance and how do organisations and businesses perform after fundraising on alternative finance platforms?
- How do people find out about various alternative finance models and what do they think of them having used them?
Some of the conclusions of the authors are that crowdfunding and peer-to-peer lending are using the Internet to link up those that have money and those that need it. This helps individuals, community groups and businesses get the money that they need to make progress, when they would not necessarily be able to get this money elsewhere. Specifically, Nesta has led research into these forms of alternative finance. Working together with the University of Cambridge as well as the ACCA and PwC the organisation has carried out a major survey into this sector – the largest of its kind so far. This has included getting the views of people generally as well as those that have used these sources of finance to raise funds.
Age of funders. Image source: NestaPhenomenal Growth In The Alternative Finance Market
Some of the major findings of the research show phenomenal growth in the alternative finance market. For example, the Nesta report shows that in 2014 the alternative finance market is expected to grow to £1.74 billion. This is a growth rate of 161% between 2013 and 2014. Additionally the alternative finance market grew by 150% between 2012 and 2013. It is anticipated that the UK alternative finance market will have contributed £1 billion of growth and working capital. This has been received by 7,180 small and medium sized businesses. Interestingly, as Nesta points out this would be the same as 2.4% of banks lending to businesses by the close of 2014. This has led to growth for small and medium sized businesses. In particular, 70% of SMEs that used peer to peer lending have found that their turnover has grown since gaining access to this type of funding, and 63% reported a growth in profit.
Alternative finance has also had some other encouraging developments. For charities the use of alternative finance has been particularly encouraging, with three in four backers of projects with a social focus reporting giving funds additionally to what would otherwise be given to charities. Overall, the study found that one in seven UK consumers used one alternative finance model. An area of growth that still needs to be worked on is encouraging more small and medium sized businesses to take up these types of alternative finance, and less than 10% of UK SMEs reported that they had used an alternative finance approach to get access to monies. That said, the study also found that peer to peer business lending has achieved an average growth rate of 250% and it is projected that by the end of 2014 that this method of raising funds will have “facilitated loans worth £749 million.
Growth of the crowdfunding market. Image source : NestaFindings of the report were also broken down into a range of different sectors. In the sector of Community Shares it was found that the average amount raised was £174,286. Only 24% of investors in these types of projects were concerned with achieving a financial return. With Debt Based Securities the average amount raised was much higher, at £730,000, and investors in this area valued being able to make a positive social impact in 85% of cases. Donation Crowdfunding achieved an average amount raised of £6,102 and in addition 27% of the donors offered to help or volunteer with backed projects. Meanwhile Equity Crowdfunding achieved an average amount raised of £199,095. Encouragingly 60% of the companies that secured funding had increased employment leading to greater opportunities for some.
Findings for P2P Business Lending showed that the average amount borrowed was £73,222 and interestingly that 83% of lenders in this area were men. P2P Consumer Lending achieved an average amount borrowed of £5,471. In this area 46% of those that raised money used the loan to purchase a vehicle. Pension Led Funding saw an average amount raised of £70,257 with 60% of these organisations having five or fewer employees and 7% were sole traders. Meanwhile Rewards Crowdfunding led to people raising on average £3,766. Interestingly in this area 72% of the funders knew the person running the campaign either in person or by reputation.
Paula Newton is a business writer, editor and management consultant with extensive experience writing and consulting for both start-ups and long established companies. She has ten years management and leadership experience gained at BSkyB in London and Viva Travel Guides in Quito, Ecuador, giving her a depth of insight into innovation in international business. With an MBA from the University of Hull and many years of experience running her own business consultancy, Paula’s background allows her to connect with a diverse range of clients, including cutting edge technology and web-based start-ups but also multinationals in need of assistance. Paula has played a defining role in shaping organizational strategy for a wide range of different organizations, including for-profit, NGOs and charities. Paula has also served on the Board of Directors for the South American Explorers Club in Quito, Ecuador.
