European companies looking for new sources of capital are increasingly turning to alternative solutions. By the end of the year, the market for non-traditional borrowing could top €7 billion (nearly $8 billion), more than doubling its 2014 value of €3 billion. According to the latest research, alternative funding in Europe is well on its way to moving from a niche market to established and rapidly growing segment.
In a first-of-its-kind study released this week, the University of Cambridge partnered with Ernst & Young to look at alternative finance, particularly online tools, across continental Europe. The money provides capital to startups, offers credit to SMEs, diversifies access to funds, and spurs innovation and job creation across Europe, the report shows. The United Kingdom dominates the alternative funding market valued at €2.34 billion, but France (at €154 million) and Germany at (€140 million) are also healthy rapidly growing markets.
For businesses, peer-to-peer lending was found to be the most popular funding model. Using the Internet to connect borrowers and lenders, businesses receive financing at less expense than traditional bank loans. Excluding the UK, which the report considered separately, European P2P business lending grew 272 percent from 2012 to 2014. Business P2P lending generated €93 million (without the UK). Speed, flexible financing terms, transparency and ease of use make peer funding is the top choice.
Crowdfunding has also matured in Europe. Generally thought of as many of individuals contributing small amounts, the segment now attracts investors looking for high return. Equity-based crowdfunding grew to €82.5 million, and other popular models including invoice trading and pension-led funding are also picking up steam.
United Kingdom Leads Europe in Alternative Financing
The UK eclipses the rest of the European alternative finance market, making up nearly 75 percent of the market share. At €2.34 billion, the UK’s alternative finance market is nearly four times larger than the rest of Europe’s market combined.
Peer-to-peer lending was founded in the UK a decade ago. In the most mature market for online alternative funding platforms, self-regulatory body the Peer-to-Peer Finance Association was created in 2011. The market’s maturity is also reflected in the technical support in place, including a legal definition of P2P lending and consumer and business protections.
Although well established, P2P business lending within the UK continues to grow at a breakneck pace. In 2014, nearly £1 billion ($1.55 billion) of funding was provided to 7,000 businesses, growing 253 percent since one year earlier. Funds raised equal roughly 3 percent of the monies provided to SMEs by traditional banks.
P2P lending dominated the UK market, but invoice trading and equity-based crowdfunding are also popular with SMEs. Invoice trading – selling invoices for working capital – grew 174 percent to €354 million last year, becoming the second most used way businesses are raising capital. Equity-based crowdfunding, which is extremely popular with startups and other early-stage businesses, increased in volume more than four times to just over €111 million.
Institutional investors are taking notice of the findings outlined by the University of Cambridge and Ernst & Young’s study. UK-based P2P lender Funding Circle raised $65 million in 2014 in a round of funding that attracted United States-based tech investors Union Square Ventures and Ribbit Capital. Hedge fund Marshall Wallace raised £200 last year for the IPO of the UK’s first peer-to-peer fund, P2P Global Investments. In early 2015, fund supermarket Hargreaves Landsdown unveiled plans to create its own P2P lending platform.
Experts say large institutional investors risk changing the non-traditional grassroots history of alternative lending. “There has been a surge of institutional investor interest and money coming into the sector (and state monies),” said Bruce Davis, director of the UK Crowdfunding Association (UKCFA) and managing director of Abundance Generation in a statement, “and platforms need to ensure that the ‘crowd,’ which we fought so hard to keep in the frame, is not, ironically, crowded out by big money.”
Finding a Balance
While the study’s authors believe the alternative finance market will continue to see rapid growth across Europe, uneven regulations from nation to nation could stifle the pace. While growing year over year, the rate at which ventures seeking to raise alternative financing has fallen. From 2012 to 2013, European businesses receiving funding jumped 177 percent; between 2013 and 2014 the growth rate dipped to 68 percent. The rate of lenders joining the market has also slowed.
Europe’s regulatory landscape is multifaceted and ever changing. Some countries, such as the UK, have firm rules in place. Some have extended existing regulations to cover online alternative finance, while some have little regulation in place – or none at all. Nearly 40 percent of respondents in the research felt their nation’s proposed or existing regulations are “too strict.” In contrast, almost 18 percent of those in countries with no regulations are actively calling for oversight. Striking a balance between regulation and facilitating growth will be central to the continued success of alternative financing in Europe.