Before the credit crunch which followed the financial crisis of 2007, alternative finance was seen as a niche area of the lending market. The majority of property developers and landowners who wished to borrow finance secured against their land, would typically approach a bank or building society for a loan. However, in the years since the crash, alternative lending has become an increasingly fashionable way to raise money.
The Impact of the Financial Crisis
In the wake of the financial crash, many traditional lenders had to rebalance their lending models, in order to minimise their exposure and to boost capital, and found themselves bound by new regulations. These changes resulted in a sharp reduction in the number of loans issued. According to the Department for Business and Skills, around 50% of first-time borrowers have had loan applications rejected.
The Growth of Alternative Finance
However, alternative finance soon began to address the unmet demand within the lending market. In 2012, the alternative finance market in Europe as a whole was valued at €1,127m. By 2015, the market had grown to €5,431m.
Source: Cambridge Centre for Alternative Finance
Non-traditional alternative finance offered an increasing volume of lending to individuals and Small and Medium Enterprises (SMEs), creating a thriving industry which could now respond with greater speed and fluidity than traditional lenders. One area of strong growth was in the property sector, with alternative finance funding for real estate amounting to almost £700 million in 2015.
Banks and building societies no longer had a monopoly on finance and lending, as new alternative loan products, such as peer-to-peer lending, debt-based securities, profit sharing, and real estate crowdfunding, all helped to plug the funding and lending gap created by the financial crash. The UK government has also been supporting the sector via the British Business Bank, which lent £60m to SMEs using the alternative finance market.
The Benefits of Alternative Finance
Alternative finance offers a range of benefits. The main advantage is the speed at which funds can be made available. Due to the bureaucratic complexity of the traditional banking system, applying for funds can often mean a wait of weeks, or even months, between completing the initial application and the money being made available. Many forms of alternative financing can approve and transfer funds within days of the initial request. This speed makes it the ideal tool for SMEs who wish to move their opportunities forward immediately.
Typically, those that lend using alternative finance face less scrutiny compared to that displayed by traditional lenders, which means that once the funds are released, they can be used with a greater degree of freedom and flexibility.
As the alternative finance market continues to grow, perhaps the biggest testament to its continued success is the fact that large multi-national brands, such as Amazon and Virgin, are looking to enter the sector by forming partnerships with existing alternative lenders. The future of the sector is looking positive, and, using current projections, it is estimated that the industry will be worth £12bn by 2020.