Alternative Finances

UK SMEs Buried In Alt Lending Choices

When it comes to choices for alternative financing providers, the U.K.’s SMEs benefit from having ample choices — but does having more choices always make the lending process easier?

Recent survey data from the Funding Centre — the content-led alternative finance aggregator — shows that the U.K. alternative finance space is “growing at a dramatic rate,” which has created a crowded platform that has created a tedious process for SMEs to sort through when looking for a lending. The P2P and P2B lending sector makes up just over half the alternative lending space with its 56 platforms, but according to the Funding Centre’s data, there seems to be alternative finance providers sprouting up at a rate that’s hard to keep up with. In total, the Funding Centre noted 108 alternative finance platforms.

“The alternative finance space has grown at a phenomenal rate in the last year but the sheer number of platforms is now daunting, as this survey reveals,” wrote Funding Centre founder David Stevenson. “Being honest even a well-informed business could end up spending days just researching all the alternatives online and then figuring out which product works for them.”

At a time when SMEs are looking toward alternative lenders to keep them afloat — particularly because of small businesses that rely on the funding to make up from late payments from buyers — the steady flow of capital is needed to keep their businesses functioning. And with the breadth of choices overwhelming many SMEs, having too many options that weigh down company decision makers when it comes to knowing what route is the best option may be hindering the SME alternative lending process.

The head of the British Business Bank has announced plans to enact a new program by 2016 to facilitate traditional lenders and big banks in referring small businesses that have been rejected for a loan to alternative financing options. The Bank also revealed on March 24 that it is now inviting applicants interested in running an online platform that would connect these small businesses to alternative lenders.

The Funding Centre survey noted that the U.K. alternative finance industry has roughly doubled each year since 2012, hitting a total of £1.75 billion in 2014 (about $2.61 billion USD) that were investments by U.K. platforms. But as the industry grows, there are always risks for SMEs and the lenders they work with — which may also be a future concern for the industry.

“We expect this trajectory to continue in 2015 driven by a heightened focus on customer acquisition, legislative and regulatory changes and greater awareness of alternative platforms amongst borrowers,” according to Mark James and Fergus Lemon of PwC, who jointly provided comments in the Funding Centre’s press release on the survey. The duo also noted the risks to the growing industry.

“However, with this expansion will also come risks. Headlines which to date have largely focused on growth could potentially be overshadowed by cyber threats, defaults and even platform failures,” they noted in the release.

In an article analyzing the growth of the U.K. alternative lending market, Forbes contributor Trevor Clawson shared his thoughts on how the rapid growth in the space and the influx of new players could simply be too confusing for those looking to get quick access to capital. He provided some key figures as to why this issue may need some more examining, particularly because SMEs often need to turn to alternative lending options when they can’t get backing by the banks.

“For small and medium sized businesses, growth in the sector is clearly good news. Britain’s banks remain the biggest source of finance for SMEs and very often the first port of call. However, many loan applications are rejected, with first-time applicants seeing a 50 percent refusal rate,” he wrote, citing figures from the U.K. Treasury. “Things do appear to be improving. …Nevertheless, securing bank support for a startup or even for an established company’s growth strategy can still be difficult.”

Clawson cited figures from the British Bankers Association that noted that new lending to small firms hit £29 billion (43.27 billion) in 2014, which was a 9 percent increase from 2013. Alternative lenders help fill those gaps that banks can’t provide, he said, but called the market “fragmented,” and said it remains a “confusing marketplace” for many SMEs looking to get financing.

“This is a complex market and for businesses that have previously been accustomed to talking only to their bank relationship managers, making sense of the crowdfunding and peer to peer universe isn’t necessarily easy,” Clawson wrote. “Nor can it be taken as read that accountancy firms and other business advisors will have expert knowledge.”

But in terms of how the U.K. alternative lending space can develop, Stevenson said the sector is “at a tipping point,” but that has left many SMEs not knowing which direction to turn toward, suggesting that there are “too many brands and too many platforms.” But as the U.K. alternative lending sector grows, there needs to be education for those looking for which route to finance. Should they get equity or go for debt? These are questions SMEs need to decide, wrote Clawson, who added that, as the industry develops, the sector may not be as overwhelming for some SMEs.

“As the market grows and develops, information providers will surely become an integral part of the ecosystem,” he concluded. And that’s where companies like the Funding Centre are trying to fill the gap, by aggregating information for the SME market to help its leaders make more informed decisions about their financing options.

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