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Alternative finance 2014 update

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23rd Dec 2014
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Robert Lovell provides a round-up of developments throughout 2014 in the alternative finance market.

In 2014 the alternative finance market is expected to grow to £1.74bn - up 150% from 2012 to 2013 and on track to grow by 161% from 2013 to 2014.

By the end of the year it is expected to have provided more than £1bn of growth and working capital to 7,180 small-and-medium-sized businesses. This now stands at an equivalent to 2.4% of bank lending to businesses.

According to the recently published NESTA report into the market, the diverse UK market is growing rapidly, and has more than doubled in size year-on-year from £267m in 2012 to £666m in 2013 and to £1.74bn this year.

More and more entrepreneurs, SMEs, charities and community organisations are obtaining finance, which in many cases they would not otherwise be able to secure.

Here AccountingWEB gives an update on 2014 developments.

Peer-to-peer

Peer-to-peer business lending includes debt-based transactions between individuals and existing businesses, which are mostly small businesses with many individual lenders contributing to any one loan.

The peer-to-peer business market has more than tripled since 2013, largely attributed to the expansion of existing players as well as the proliferation of the model by new entrants.

Peer-to-peer consumer lending includes individuals using an online platform to borrow from a number of individual lenders.

P2P consumer has become an important force in the consumer credit and lending space, doubling over the last year, is expected to continue growing strong.

Invoice trading

Invoice trading, where firms sell their invoices at a discount to a pool of individual or institutional investors in order to receive funds immediately rather than waiting for invoices to be paid, grew by 179% in 2014.

According to NESTA the average invoice auction duration is just eight hours, with the average traded invoice value at £56,075.

Businesses using invoice trading platforms tended to be small with more than 90% of them having fewer than 50 employees. More than 40% of these have been in business for more than 10 years, and a third were less than five years old.

Of the businesses surveyed by NESTA almost all had a turnover of more than £200,000.

Crowdfunding

Equity-based crowdfunding, which includes the sale of a stake in a business to a number of investors in return for investment, grew by 201% in the last year

Predominantly used by early–stage firms, equity-based crowdfunding continues its expansion, facilitating £84m in predicted total transaction volume for 2014.

The reward-based crowdfunding market, where individuals donate towards a specific project with the expectation of receiving a non–financial reward at a later date, grew to £26m up 17% in 2014.

According to NESTA’s data, the average size of the reward–based fundraising campaign is £3,766 with 77 backers per campaign and an average donation of £48.92.

Pension-led funding

Pension-led funding is now a £25m market, and mainly allows small-and-medium-sized business owners or directors to use their accumulated pension funds in order to invest in their own businesses, mostly as working or expansion capital through SIPP or SASS instruments.

The average amount raised through PLF is £70,257, and intellectual properties are often used as collateral.

Debt-based securities

The debt–based securities market, where lenders receive a non-collateralised debt obligation typically paid back over an extended period of time, grew by 63% in 2014.

Online debt-based securities in renewable energy projects grew by 63% in 2014 to £4.4m in total financing. The average deal size for debt-based securities is £730,000, and on average, it takes 587 investors to fund a renewable energy project through debt–based securities with an average investment amount of £1,243, according to NESTA.

2014 milestones

Back in March there was a flurry of activity in the alternative finance market, which saw the emergence of a new portal, alternativebusinessfunding.co.uk at an industry conference in London. Vince Cable was on hand to laud the new portal and show the government’s support.

The platform is a collaboration between some of the UK’s alternative funders, and between them CrowdCube, Funding Circle, Market Invoice, Platform Black, Seedrs, Zopa and Pensionledfunding.com accounted for around 85% of the alternative non-bank funding market.

When it came to the Budget, it was revealed that banks could be forced to direct rejected loan applicants to alternative finance providers.

Under new legislation banks would be legally obliged to help match small firms that are turned down with alternative lenders.

The government then launched a consultation on mandatory referrals in an effort to increase sources of finance for small businesses and spur on the alternative marketplace.

With a legislative timetable in place to force UK banks to refer small businesses to alternative funders, the Alternative Business Funding platform announced in November its plans to accelerate growth with TradeRiver Finance and Boost Capital.

They joined the platform on 23 November and it was revealed that a further 25 to 30 funders would join before the legislation comes into effect in April 2015.

Judging by all the developments and strong year-on-year growth across all the sub-sectors, it’s clear that the alternative funding space remains fast-growing and highly diverse.

Alternative finance has a great opportunity in the months ahead to help small and medium sized businesses invest and grow around the UK.

What will you be recommending your clients?

Replies (1)

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By KWest
27th Dec 2014 13:48

I will be recomending...

That however a client approaches external financing they first calculate and plan their profit and cash flow needs using this: http://www.figurewizard.com/what_if_calculator.html

PS: Scroll down and include the charts in the planning.

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