Alternative lending for businesses may have only started a few years ago, slightly behind the US market, but it seems as though 2015 was the year that it rapidly caught up. Last year was a phenomenal year for FinTech in the UK, with alternative lending making the headlines time and time again. Therefore it may not remain “alternative” for long as it begins to play a significant role in UK’s small business economy.
Research suggests that the amount of alternative loans provided to UK businesses over a three-year period grew immensely from $400 million in 2013, to an expected $6.7 billion by the end of 2015, reflecting a growth of 1675 per cent. This massive growth is nothing short of remarkable for both the alternative lending industry and SMEs, as they are considered to be the backbone of the UK economy.
So what happened in 2015 to make it such a notable year?
1) Investments rose to new heights
Last year we saw increased equity and capital investments into alternative lending platforms, indicating that this new form of lending is here to stay. This is correlative with a worldwide trend of investors searching for yield in an all-time low interest environment, which in turn directs investors further into a wide range of alternative investments.
Some of 2015’s top investments include MarketInvoice raising $15 million, Funding Circle securing $150 million, and subsequently reaching a $1 billion valuation, Iwoca raising $20 million and Crowdcube raising $9.3 million. This is just a snippet of the investments made in 2015, and these investments account for only a handful of last year’s venture capital investments in alternative lending platforms.
2) Banks begin to participate in the game
Speculation over what will happen to the banks was hot this year at FinTech conferences and the recurring question has been: are the banks becoming irrelevant? The answer is no. Banks are an important player in the current and future alternative lending landscape, through the understanding that the alternative lenders are not competitors.
There is a real opportunity for collaboration that will lead to mutual growth. The emergence and growth of alternative lending to businesses resulted in a real gap in the market. With increasing capital requirements for banks, they are more careful in their allocation of capital, and that results in more scrutiny in their choice as to whom to lend to and under what conditions. Since 2008 we have seen a decline in banks facilitating business loans in the range of up to $500,000. The reason is simple: the costs of processing a $100,000 loan is comparable to that of $1 million, but with a lot less profit.
A few pioneering examples of such collaboration can be seen in recent announcements. JP Morgan announced that it signed a partnership with Ondeck, to originate, underwrite, and distribute loans targeted specifically at small businesses. Santander participated in Kabbage’s $135 million E round along with Reverence Capital Partners, ING, Santander InnoVentures and Scotiabank. In the UK specifically we are seeing early signs of collaborations with RBS launching a pilot to refer small businesses to Funding Circle and Assetz Capital.
3) A maturing market
This last year we have seen a growing number of new lenders, offering a wide variety of financial products and loan terms that were unavailable to businesses beforehand. Estimations indicate that there are over 100 alternative business lenders in the market. As the market continues to mature, we are beginning to see consolidation, such as Ezbob’s merger with Everline, and other collaborations with banks. However, more importantly, we are seeing the economy stabilise and flourish with new sources of finance for business.
As we settle into 2016 and look back on the evolution that has occurred over the past year, it is fair to say that this is just the beginning of an amazing transformation in the alternative lending industry. The ever increasing diversity in the lending landscape, along with greater equity and capital investment and an increased collaboration from banks, has created the perfect storm for success. Alternative finance is changing the game of traditional finance for good.
Sharon Argov, CEO and Co-Founder of Fundbird