ULSTER UNIVERSITY BUSINESS SCHOOL
SME FINANCE : WHAT ’ S THE ALTERNATIVE ?
by Mike Pogue , Senior Lecturer , Financial Services Business Development , Ulster University Business School
erhaps the simplest definition of alternative finance is that originating
Pfrom outside the traditional banking sector . In light of the apparent reluctance of the banking sector to lend in the absence of liquidity subsequent to the financial crisis , alternative finance has attempted to fill the vacuum created .
Although the financial crisis is probably regarded as the primary watershed in the development of alternative finance , it could be argued that Zopa was the original disruptor in 2004 .
Zopa ’ s premise was simple , borrowers were being charged high rates by the banks but depositors were being offered low rates , so there was a market between these rates and P2P ( PeertoPeer ) lending was born .
Other forms of alternative followed P2P , most notably crowdfunding , asset based finance , mezzanine finance and community shares .
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PeertoPeer Lending
Peertopeer lending almost exclusively dominated the alternative finance market post 2007 and ten years later still accounts for around 80 per cent of the market . However the type of lending has changed during this period from almost exclusively P2P consumer lending towards P2P business lending of which a significant portion is based on real estate . The operation of the P2P market is illustrated in Figure 1 below .
The efficient functioning of the P2P lending market depends on the role of a platform to fulfil the role of intermediary between the consumer and the borrower . The platform market is dominated by a small number of large platforms ( Zopa , Funding Circle , Ratesetter ).
The attraction to investors is the significantly higher interest return on offer , often six to eight per cent , in contrast to the typical 1.5 per cent currently available on
QUOTABLEQUOTE
Businesses are increasingly being affected by lengthy waits for payment over and above the standard 30 days . This problem is more acute for smaller businesses ; businesses with a turnover of less than £ 1million now wait an average 72 days for payment . Mike Pogue