Alternative Finance in the U.K. – it’s a “Crowded Market”
Banks remain the biggest source of finance for SMEs in the UK and are very often the first port of call. Nevertheless, securing traditional financial support for a company’s growth strategy can still be tough, particularly for a start-up but even in the case of a more established venture. Alternative finance is increasingly filling this funding gap.
According to the European Alternative Finance Benchmarking Report (published in February 2015 by the University of Cambridge and EY), the alternative finance industry in the UK was valued at €2.34 billion last year. This represents nearly 75% of the total value of the online alternative finance market in Europe and makes the UK's online alternative finance market worth more than 15 times the next largest comparative market in Europe.
In March 2015 a survey carried out by crowdfunding aggregation platform, The Funding Centre identified no less than 108 alternative finance platforms. According to the survey, the peer-to-peer (“P2P”) and peer-to-business (“P2B”) lending sector fills just over half of the alternative finance space with 56 platforms. Crowdfunding (equity and reward) comes second with 42 platforms, while invoice financing, revenue-based finance and the up-and-coming trade finance industry comprise the rest. While conducting this research The Funding Centre seemed to be discovering new alternative finance providers every day.
The alternative finance scene in the UK is therefore, one might say, crowded. As a result, the risk for customers is that the market can appear complex. For established, traditional businesses that have previously been accustomed to dealing only with their bank relationship manager, making sense of the crowdfunding and P2P/B markets isn’t necessarily easy. This provides an opportunity for a range of advisers, including lawyers, to help businesses navigate this rapidly growing industry.
The other major opportunity for lawyers is the provision of advice to the finance platforms themselves. We at Capital Law have become increasingly involved in this. The advice we give broadly falls into three categories:
1: Operational - this includes drafting website terms and conditions or, for example, precedent loan agreements for P2P/B lending platforms;
2: Regulatory – the assumption by the Financial Conduct Authority of responsibility for the regulation of consumer credit (which includes P2P/B) in April 2014 created a whole new set of rules for platforms, thereby creating an opportunity to develop a new offering to clients;
3: Strategic – we are already seeing some consolidation in the alternative finance market and are currently advising on the sale of a platform.
In summary, the alternative finance market may be crowded, but there is still room for us lawyers!