Online alternative finance

By | Business
One crowdfunding platform is Kickstarter, which has reportedly received over $1 billion in pledges from 5.7 million donors to fund 135,000 projects, which include films and music. In the Image is Kickstarter co-founder Perry Chen. Image credit - @Jason Hargrove via flickr.co.uk

In 2014, the total amount raised through various alternative finance models is on track to more than double compared to 2013. In the first three quarters of 2014, alternative finance platforms facilitated loans, investments and donations worth £1.2 billion, with platforms predicting the amount to reach £1.74 billion by the end of the year.

As described earlier, alternative finance is an umbrella term covering a very diverse market containing different models. Looking across the different models of alternative finance, most grew substantially in 2014. On volume of funding facilitated, peer–to–peer (P2P) business lending and P2P consumer lending continue to dominate the market with £749 million and £547 million lent through those models respectively in 2014.

Invoice trading, is expected to grow to a £270 million sector by the end of the year, up by 179 percent from 2013. Equity–based crowdfunding is on track to grow to £84 million – a 201 percent increase from 2013, whilst reward and donation–based crowdfunding are expected to reach £24 million and £2 million in the same period. Finally, loan–based securities, pension–led funding and community shares are expected to register £4.4 million, £25 million and £34 million respectively by the end of 2014.

Looking at growth figures from the past three years, it is projected that the UK alternative finance market may grow to around £4.4 billion in 2015 if current growth remains buoyant. There are a number of factors that suggest growth may continue apace. Firstly, when asked, current users of UK alternative platforms indicate that they are very likely to use alternative finance models more in the future. More than half of P2P business lenders for example, plan to lend more in the coming year than last year. On the borrower side, 86 percent say they might be ‘likely’ or ‘very likely’ to approach alternative finance platforms first in the future even if a bank were to offer funding on similar terms.

In addition, another factor that indicates significant potential for future growth is that 42 percent of individuals participating in a national survey were completely unaware of any type of alternative financing activities or platforms. Even more promising for the growth potential of the market is that just 14 percent of the respondents in the same survey had used an alternative finance platform, leaving significant scope for expansion. Looking at potential fundraisers, there are also indications of the potential for future growth.

The diverse nature of the alternative finance industry means that projects and businesses from a wide range of sectors are able to source funding for various purposes. Consequently, there are also significant variations in the usage and amounts raised by people and organisations through the different alternative finance models.

By the end of 2014, it is expected that the UK alternative finance market might have provided working, growth and expansion capital to an estimated 7,180 SMEs as well as crucial funding for hundreds of community and voluntary organisations across the country. By the end of the year, over 80,000 people may have acquired personal loans from P2P consumer lending platforms, of which many are sole traders borrowing money for business purposes.

Since successfully raising finance, individuals and businesses have seen a variety of positive impacts. Three quarters of those that received funding through reward or equity–based crowdfunding launched a new product or service after funding rounds. Seventy percent of SME borrowers of P2P business lending have seen their turnover grow since secured funding with 63 percent of them recording a growth in profit.

Alternative finance models also facilitate significant giving to good causes predominantly through the reward, community shares and donation–based models as well as to renewable energy ventures through loan–based securities. For donations and reward–based crowdfunding 23 percent stated the money they donated or pledged might otherwise be used for charitable giving, indicating that alternative finance is providing significant additional giving to social good projects. As well as the funds provided, crowdfunding is helping increase volunteering and social action. Results show that 29 percent of backers on donation–based crowdfunding platforms had also given advice and feedback to campaigns and 27 percent had offered to help or volunteer with the project. Correspondingly, 34 percent of fundraisers have seen an increase in volunteerism after they fundraised through donation–based crowdfunding.

How may crowdfunding assist start-up businesses in the UK?

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