The University of Cambridge and Nesta have just published their report on the progress made by the online alternative finance sector during 2015. The report is appropriately entitled 'Pushing Boundaries'.
During 2015, online alternative finance platforms provided £3.2 billion of finance according to the report, with £2.2 billion of this going to small and medium-sized companies (SMEs) in the UK. In 2014, £1.74 billion of finance was provided with £1 billion going to SMEs, so the sector has experienced impressive overall growth of 84 per cent during 2015, with business finance growing by 120 per cent. Indeed, the report estimates that 3.9 per cent of all loans made to SMEs during 2015 came from online lending platforms. This figure rises to 13.9 per cent for small companies with a turnover under £1 million. This is clear evidence that online lending platforms are helping companies to gain much-needed access to finance to allow them to grow and employ more people.
The introduction of the IFISA should allow increased, effective lending
Loans to companies from online platforms amounted to £1.49 billion of the total £2.2 billion of business funding during 2015. Of this, £609 million was lent to the property sector to fund around 600 commercial and residential developments. Enthusiasm for property lending through P2P business platforms is high, with a large proportion of current funding coming from institutional investors. However, the report includes an extract from a study done for alternative-finance media outlet, AltFi, at the end of last year, which states that, "44 per cent of UK retail investors would like to increase their exposure to the property market, not only through owning their own home, but also in other ways, such as investing through peer-to-peer lenders." The introduction of the Innovative Finance ISA (IFISA) in April of this year should allow retail investors to access this segment of P2P business lending more effectively and platforms involved in property lending believe that the IFISA alone could increase property lending via platforms by 51 per cent during 2016.
Of the remaining £881 million of business lending in 2015, the report estimates that loans were made to over 10,000 SMEs in the UK. The top industry sectors lent to were manufacturing, engineering, transport, utilities, finance and retail. In terms of geographic location of borrowers, the top region was the West Midlands, followed by London and the South East. Given the prevalence of lending to manufacturing and engineering companies, it is not surprising that the West Midlands was the top region and it is good to see that companies outside the South East are benefiting from the alternative finance revolution.
The UK is one of the most attractive places in the world to start a business
Equity crowdfunding saw very considerable growth during 2015, increasing from £84 million in 2014 to £332 million. Real estate also featured in this segment of the market, accounting for £87 million of equity finance. £245 million of pure venture finance came from online platforms such as Seedrs and Crowdcube during 2015 and the report estimated that they were responsible collectively for 15.6 per cent of all venture funding in the UK. This is an outstanding achievement and makes the UK one of the most attractive countries in the world to start a business.
The UK government's role in encouraging alternative finance should be acknowledged. The regulatory regime is relatively benign for platforms, which was acknowledged by the report, and the existence of schemes like the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme have been very helpful to those seeking to raise equity investment because of the generous tax benefits that they afford to investors. In addition, the British Business Bank has lent in excess of £60 million through business lending platforms, which has helped those platforms establish themselves as a real alternative to the banks as lenders to business.
The fintech sector is growing at a very rapid rate and there is much for the UK to be proud of. The key point, though, is that proper access to finance will allow SMEs to create jobs. 60 per cent of people employed in the private sector work for small businesses and access to finance for them is vital for the UK's future prosperity and growth.
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