If you’d asked any expert five years ago to predict trends in small business funding, few could have foreseen alternative finance permanently altering Britain’s financial services landscape. What was a minnow of an industry is now a serious force to be reckoned with, and traditional banking institutions are even adopting some of our innovations and digitally-savvy tactics. We’ve come a long way, but what might the next 12 months hold for those of us working in alternative funding?
Coming of age
Firstly, I expect this year to be the one when the very term ‘alternative finance’ becomes redundant. What was once a disruptive newcomer shaking up financial practices, and breaking the rules of business funding, will finally be acknowledged as part of the mainstream, something I believe we’ve already achieved in practice. When the likes of Santander in the UK have embraced peer-to-peer lending, and Amazon are offering business loans to their marketplace vendors, you know the idea of the bank manager being the only place for business owners to go for money is well and truly over. These larger entities have seen what we upstarts have been doing, as well as our success, and they’re keen to try to replicate it. The UK alternative finance market is expected to be worth £12.3 billion a year by 2020, according to Fiserv (https://www.fiserv.com/international/resources/future-trends-uk-banking-part-two.aspx), an enormous sum for a relatively nascent industry.
Alternative finance has established itself sufficiently now to be able to build on the foundations laid over recent years, with some consolidation between providers also probable, and I wouldn’t be surprised to see some more partnerships between large and smaller funders in the months ahead. The result will be a stronger, less fragmented presence in the UK’s lending sphere, and a greater level of visibility for alternative types of business funding, which can only be a good thing in terms of engaging with more small business customers.
Analytics on the up
Fintech companies have a distinct advantage over their older, more established peers in that they’ve been founded upon data analysis, using sophisticated systems, software, and algorithms to read customer information quickly with the intention of delivering fast, efficient funding decisions. The consumer demand for this enhanced level of customer service is only going to grow, I believe, as more day-to-day business is conducted via mobile devices, on the move, and with time being of the essence. Digital technology continues to develop at such an astonishing rate, the challenge for our industry is to keep abreast, and integrate these new innovations into our working methods and processes swiftly, where it’s appropriate and useful. Many organisations operating in the alternative sphere are still of a size and temperament to be adaptable and nimble in the face of change. So, we must keep pace with technology, and maintain the lead we have on the traditional banking behemoths to continue to meet the needs of our increasingly demanding business customers.
Arrival of the referral scheme
There is the long-awaited introduction of the bank referral scheme to look forward to, a move by the Government to push the major finance institutions to pass on details of SMEs rejected for credit to alternative lenders. This initiative was announced by the Chancellor back in the summer of 2014, yet the British Business Bank, which is overseeing the implementation of the scheme, suggests it won’t be live until the latter part of this year at the earliest, according to reports (http://www.thisismoney.co.uk/money/smallbusiness/article-3318699/Bank-referral-scheme-jilted-small-businesses-faces-late-start.html ). There have already been months of frustrating delays, but help is needed now. Seven out of ten SMEs rejected for a bank loan do not go on to raise alternative finance, research from the Department for Business, Innovation and Skills indicates. This is a terrible waste, since our industry is hungry to work with these frustrated business owners who have the potential to do so much for the general health of the UK economy.
A degree of force is necessary, as the banks have jealously guarded their information in the past, despite showing little appetite to help the ambitious small business owners they count among their customers. And, while the availability of credit to SMEs does appear to be improving slowly, according to official data (http://www.bankofengland.co.uk/publications/Documents/creditconditionsreview/2015/ccrq315.pdf ), too many small enterprises’ growth is still stunted by a lack of working capital. Alternative providers want to reach more of Britain’s small business community, but we need help to do so. I hope this scheme can enable us to achieve that aim – as long as it doesn’t require companies to go through endless appeals procedures beforehand, as I’ve warned in the past (http://www.boostcapital.co.uk/blog/bank-referral-scheme-uk-business-alternative-funders/ ), and it is genuinely designed to help as many businesses as possible.
Lessons from elsewhere
One exciting prospect is that alternative platforms will take off in some of the poorer parts of the world, a proposition that has great implications for how we operate here. Nesta, the innovation charity, predicts (http://www.nesta.org.uk/blog/not-disrupting-building-crowdfunding-and-p2p-lending-will-be-integral-part-new-financial-systems-developing-economies ) our way of lending to SMEs will become the norm in developing economies, which have fewer established traditional banking providers. Much as the mobile phone was adopted as a banking medium in these countries, teaching the big banks of the West how to roll out mobile banking at home, it could be the developing world that demonstrates how fintech lenders can build a truly innovative financial services market. And, as is often the case, there will be valuable lessons for us all from such a development.
Overall, I anticipate that 2016 will see alternative finance continuing to innovate, streamlining the processes of business funding, and injecting more excitement into the monotony of the financial services world. If we can give SME owners what they want – fast capital in as slick, convenient, and hassle-free a package as possible – our relevance among that hard-to-impress community will only grow. Simplicity and speed are key, as is great customer service, elements at the core of our industry, and giving us a competitive advantage we must fight hard to retain. All in all, it is shaping up to be a thrilling year ahead for alternative funders - and the businesses they were created to serve.