By the end of 2014, alternative finance will have provided the funding needed for 7,180 SMEs to expand as well as providing money to community and voluntary organisations across the UK.
The importance of the alternative finance market was also highlighted in the surveys of users of alternative finance platforms, where many fundraisers stated that they would have struggled to source funds otherwise. This is particularly true in donation–based crowd-funding where 64 per cent of those who raised money say it is ‘unlikely’ or ‘very unlikely’ they would have been able to access the funds they need if they could not have turned to alternative finance. Fifty–three per cent of those using reward–based crowd-funding thought it was ‘unlikely’ or ‘very unlikely’ that they would have been able to get funding elsewhere.
Currently SMEs are responsible for almost a third of independent business in the UK, so the various funding menthols used to encourage these to grow and develop play a pivotal role in allowing the UK economy to get back on its feet.
Despite this, these are concerns that some businesses have a very ‘rose-tinted’ glasses approach to alternative financing methods - particularly those that have a strong presence within the media such as crowd-funding.
Frangos says: “I think there is a general positive outlook on alternative finance in the media. There is the whole novelty and enthusiasm factor that goes with it and I would say that this is still very prevalent and I think it is a very positive story.
“It’s a huge story - and there will be a couple for failures. There will eventually be a campaign that raises a huge amount of money and then fails because it’s a risky business. At the end of the day, they are investing with a new liquid asset and you’re backing a team of people to deliver on something they said they’d do.”
Despite this Justin Kazmark, who works in the communications team at crowdfunding platform Kickstarter, believes that although businesses raising finance through crowd-funding may fail - it is unlikely that this will lead to the system being open to fraudulent campaigns. He says: “People invest small amounts in things that really excite them and that they are passionate about,”
“At Kickstarter we really make sure that the projects we allow on our site are validated and are legitimate campaign proposals. We also have a policy that if you don’t reach your goal, then you don’t receive any of the money.
“This policy protects the trader so they aren’t given a fraction of the money but still expected to deliver promises as well as the investor.”
Since 2014 there has been stricter regulation within the alternative finance sector with all peer-to-peer lending firms now required to be registered and approved by the Financial Conduct Authority (FCA). As a result, those looking to lend - or receive investment from such methods have much stronger levels of protection.
In tomorrow’s instalment of the alternative finance series, we provide you with a checklist of what you need to consider before approaching an alternative lender…