Securing finance for a new business venture is notoriously difficult. And there is no doubt that since the 2008 recession banks have become more risk averse when it comes to investment. For Britain’s startup scene this could have been disastrous, but thanks to groundbreaking innovation in the fintech space, the number of viable finance alternatives available to new businesses is at an all-time high.
Often dubbed the ‘Fintech capital of Europe’, the UK is home to some of the most promising brands leading the way in financial technology solutions for both consumers and businesses alike.
Where startups were once at the mercy of the UK’s biggest banking institutions, alternative lenders have swept in and triggered huge disruption in the market. For the many entrepreneurs who endured countless rejections for customary bank loans, their business concepts are now finally being realised thanks to these innovative alternative lenders.
Nesta’s Pushing Boundaries 2016 report estimated the alternative finance industry’s worth at a gigantic £3.2 billion. This figure is set to rise as technology advances and confidence in non-traditional lenders grows. With an increase in viable funding options, the new challenge faced by SMEs isn’t securing funding, but choosing the option that is right for their business.
Beyond the bank
The opacity of banks’ lending criteria and processes have long been a barrier to SME lending. A recent survey by the British Business Bank found that over 100,000 small businesses had formal loan applications amounting to approximately £4 billion rejected every year by the main British lenders.
Shailesh Jacob, founder & CEO of fintech company LoanFrame.com comments, ‘Institutions are reluctant to fund startups and SMEs that have untested ideas or no established track records. The other key reason is that SMEs usually do not have sufficient collateral to secure the bank loans. Collateral is considered by banks to be one of the traditional ways to mitigate the credit default risk.’
The high expectations banks have in terms of demanding an exemplary credit score, detailed financial data and the number of years previously in business simply cannot be fulfilled by SMEs trying to get off the ground.
Fortunately, the emergence of alternative finance lenders has led to a revolution in startup financing. The diverse range of financing options now offered are broader than they have ever been which means more opportunities for startups and growing businesses. For these financers the provision of funds isn’t assessed strictly on credit score but instead on the overall health of the business.
Head of research at Expert Market, Adelle Kehoe notes, ‘The shift in market share in business financing is shaking up the industry and we are seeing some really exciting, innovative players entering the finance arena. As the criteria for banks has become increasingly stringent, alternative lenders have been able to take advantage by creating flexible solutions that cater to the circumstances and needs of each SME.’
Some for me, some for you: equity crowdfunding
Crowdfunding is a firm favourite among entrepreneurs trying to get their creative ideas and early stage companies off the ground. The UK is home to some of the most successful crowdfunding platforms in the industry; Crowdcube, Seedrs and Kickstarter.
When Kickstarter launched in 2009, it set out on an incredible mission to empower artists and creative projects by gathering support for their ideas through ‘rewards crowdfunding’. Businesses began tapping into this reserve to gauge interest and win some initial customers.
One of the most successful crowdfunding campaigns in history was the launch of virtual reality headset Oculus Rift which raised a mammoth $2,437,429 in 30 days.
In the past 12 months there have been a staggering 18 UK equity crowdfunding rounds of £1m or more on Crowdcube and Seedrs. This particular type of fundraising method works by giving people the opportunity to invest in innovative startups in exchange for a small share in the business.
If that company becomes successful, investors will also enjoy some of the profits. Many founders turn to equity crowdfunding to find investors, ramp up production, and scale their business and it is now one of the most popular routes for small businesses in the UK.
An iconic moment for peer-to-peer
Peer-to-peer (P2P) lending is one of the fastest growing sectors within the UK’s fintech space.
The technology works by matching private investors with borrowers through an online platform, cutting out traditional banking protocols and lengthy paperwork. For borrowers the biggest selling points are flexible lending criteria, competitive interest rates and most importantly the speed at which they are able to access funds.
With so many providers to choose from, navigating the market can seem overwhelming but thankfully there are several tools that allow businesses to compare lenders and get a quick snapshot of the varying rates and recommended schemes most suitable to their individual growth plans.
In the UK there are three major players vying for the top spot; Funding Circle, Ratesetter and Zopa. Although a popular solution for growing businesses, P2P lending has been a largely unregulated and therefore a highly risky activity for all parties involved. That all changed in March 2017 when Zopa became the UK’s first P2P lender to be given full authorisation by the Financial Conduct Authority (FCA) which marked an iconic moment for the alternative lending industry.
Fintech is the Future
The relentless progression within the fintech space has transformed business financing and enabled the UK’s startup scene to thrive. If demand for investors and innovative startups continues to rise at its rate, the worth of the alternative lending industry will grow not by millions, but by billions.