Alternative Lending Market Outlook: Trends, Opportunities and Challenges

CMS hosted a panel discussion exploring some of the trends, opportunities and challenges facing the alternative funding market in Scotland. The discussion, which featured a panel of experts, including peer-to-peer (P2P) lenders Assetz Capital and LendingCrowd; British Business Bank; and Veritas Property Finance, highlighted several key takeaways:

	Use of alternatives on the rise  UK SMEs are a vital and growing part of our economy, accounting for approximately 99% of private businesses in the UK. While the big high street banks still dominate in terms of SME funding and investment, there’s no denying that the alternative lending market, in particular P2P lending, is advancing, and continuing to grow. Whilst loyalty to traditional lenders is still apparent, a survey published by the British Business Bank* found that P2P business lending rose by 18% in 2018, compared to 51% growth in 2017. On the whole, it is encouraging to see that the awareness of alternatives to traditional finance has continued to grow, with 52% of small businesses aware of P2P lending, 70% aware of crowdfunding platforms and 69% aware of Venture Capital (up from 47%, 60% and 62% respectively in the previous year).
	The Brexit effect  An increase in regulation and subsequent stricter lending requirements has deterred many SMEs from applying for funding from banks, which in turn has led to a year-on-year reduction in the number of approved loans (albeit from a very high position). With Brexit looming, many believe that access to finance post-departure could become more difficult, yet the consensus in the room was that more businesses than not would expect to grow over the next 12 months. For this to happen, SMEs with the potential for investment will no doubt need to explore other avenues of funding in order to grow at the pace required to keep competitive.
	Broker-led proposition  The panel also discussed the growing use of Brokers in the market, something which has been prevalent for a while in England but which is now moving north of the border. Several brokers in the central belt have extensive lists of possible Lenders on their internal panels and one member of the Panel commented on a well-known Challenger Bank who noted that over 80% of their business in the past year was brought in via Brokers. In due course, the Brokers are looking to become the first port of call for many potential Borrowers.
	Awareness  Gone are the days where an unsuccessful application for a bank loan may have meant no viable way ahead for a growing business. Yet as with all new sources of finance, there is a continued need to raise awareness and understanding among businesses of the pros and cons and appropriate uses of alternative funding. There is still some way to go before alternative funders are seen as a true alternative to a traditional lender, rather than a ‘tier 2’ or ‘last resort’ option when seeking finance. Indeed, the lack of general awareness and education of the funding options outside what is available from the Banks and their associated advantages is one of the hurdles that the alternative lending market is working to overcome. It’s important to realise that many SMEs are not turning to the sector as an alternative because they’ve been turned down for credit by the banks – rather, SMEs are increasingly recognising that the tailored and flexible funding arrangements P2P lenders for example offer, may serve Borrower needs better than a traditional bank product.
	Technology SMEs can be put off by alternative platforms due to a lack of understanding of the technology or a lack of trust in the service, but alternative finance is all about embracing innovation and technology and providing adaptable finance where speed of process is paramount. The flexible approach adopted by alternative lenders does not, perhaps contrary to some perception, mean that the human element and face-to-face interaction with customers has disappeared. This is still an important factor in their offering.
	Regulation  Lastly, the Panel discussed the current state of regulation of the market. There was an agreement that regulation was on its way and that this was not necessarily an unwelcome development, with many people commenting that regulation would ultimately protect investors and enhance the reputation of the market and provide clarity and transparency. The FCA’s July 2018 Consultation was very much embraced by the alternative lending market and since our discussion, the FCA has announced (on 4th June 2019) that it is introducing rules designed to prevent harm to investors, “without stifling innovation in the P2P sector”.

Conclusion 

The alternative lending market in general has already witnessed several positive outcomes and there seems no chance that the growth of the industry will slow down anytime in the coming few years, even with Brexit on the horizon. P2P’s simplicity and efficiency, coupled with its use of technology and innovation has firmly seen it enter the mainstream. CMS were delighted to host this lively panel event and look forward to continuing to play an active role in this sector in the coming months. If you would like to discuss any aspects of this summary, please contact a member of our Scottish banking team below.

* Source: British Business Bank - Small Business Finance Markets 2018/19 report