The alternative finance industry is quickly becoming an important part of the UK economy. The innovative, technology led approach has improved access to finance for SMEs and seems to be having a positive impact on social and charitable enterprises. Nesta and the University of Cambridge’s ‘UK Alternative Finance Industry Report 2014’ is probably the most comprehensive research on the industry to date. Highlights of the report include:
Funding set to more than double in 2014
The report estimates £1.7bn will be lent / invested through alternative finance platforms this year, up from £0.7bn in 2013 and taking the cumulative total (2012:14E) to c.£2.7bn.
Debt and invoice trading dominate
Loans to businesses account for c.£750m (up 288% yoy); loans to consumers £547m (up 91% yoy) and invoice trading £270m (179% yoy). Equity crowdfunding is growing rapidly but is still much smaller: estimated funding in 2014 is £84m (201% yoy).
Average amounts raised vary dramatically…..
The average equity crowdfunding raise was c.£200k whilst the average P2P business and consumer loans were £73k and £5k respectively.
… as do the average amounts lent / invested
Average amounts lent / invested are £8.1k (P2P business), £5.6k (P2P consumer) and £5.4k (equity crowdfunding). Furthermore, the automated matching mechanisms used in P2P platforms result in each lender having a much larger number of small micro loans. As an example, whilst an average equity portfolio is split across 2.5 investments of c.£2k each, the average micro loan size in P2P business and consumer lending is just £92 and £27 respectively.
Gender and age splits tell an interesting story
In equity crowdfunding and P2P business lending over 80% of funders were male, yet in rewards crowdfunding the majority (58%) were women. Separately, of the various types of platforms surveyed, equity crowdfunding has the youngest funders.
For both donations and rewards crowdfunding, only c.20% of funders say the money they donated or pledged would otherwise be used for charitable giving, indicating that crowdfunding is facilitating significant additional giving to social good projects.
Consumer funders are aware, but still reticent
Of the 2,000 consumers surveyed, 58% were aware of alternative finance in one form or another yet just 14% had used it as a means of lending / investing money. Around 60% of all respondents stated that they would be ‘unlikely’ or ‘very unlikely’ to begin / continue to use alternative finance platforms, with risk and security the most commonly cited concerns. This may change with time as the industry matures and consumers are better informed. When asked what would make them invest or save, non-users cited better returns (72%); better transparency (62%) and better guidance (62%). Near term, however, it endorses our view that the greater proportion of funding is likely to come from institutions.
SME borrowers less familiar and largely inactive to date
44% of SMEs surveyed were familiar with alternative finance in one form or another yet less than 10% had approached a platform for funds. Reasons given include not needing finance (77%), not having a problem accessing finance from elsewhere (14%) and not having enough knowledge about alternative finance platforms (9%).
The rise of P2P based business models and their ability to reshape other sectors (e.g. gambling and retail) is well documented. Whilst the majority of respondents said they would not consider P2P / crowdsourced activities for other services or products, 18% said that they would consider it for exchanging currency, 11% for insurance and 10% for mortgages. This highlights the potential for further innovation in the finance sector and beyond.
The full report can be downloaded for free here.