UK Alternative Business Lending – 2015 as a breakthrough year

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Alternative lending for businesses may have started only a few years ago with a three to four-year lag behind the US market, but 2015 indicates that the UK is rapidly catching up. This year has been a phenomenal year for FinTech in the UK, with alternative lending making the headlines time and time again. Alternative lending, may not remain “alternative” for long, as it is starting to play a significant role in the world’s small business economy.

Research suggests that the number of alternative loans provided to UK businesses over a three-year period grew immensely from $400M in 2013 to an expected $6.7B by the end of 2015, reflecting growth of 1675%. This massive growth is nothing short of remarkable for both the alternative lending industry and SME’s, as they are considered to be the backbone of the UK economy.

So what happened in 2015 to make it such a notable year?

Investments Rise to New Heights
This past year we’ve seen increased equity and capital investments into the alternative lending platform, indicating that this new form of lending is here to stay. This is correlative with a worldwide trend of investors searching for yield in an all-time low interest environment, which in turn directs investors further into a wide range of alternative investments. Some of this year’s top investments making the headlines were:

a. MarketInvoice – an invoice finance platform raised $10 million from Nordic venture capital firm Northzone
b. Ebury who focus on trade finance raised $83M from a private equity firm Vitruvian Partners and existing investor 83North
c. Funding Circle world’s largest peer to peer lender raised $150M Led By DST at a $1B+ Valuation
d. Iwoca who provide unsecured loans raised $20M
e. Ratesetter another peer to peer lender raised $30 million
f. Ezbob one of the more established unsecured lenders raised $46M
g. Lendinvest who focus on property loans raised an impressive A round of $34.2M
h. Crowdcube raised $9.3M from Draper Esprit and Balderton Capital

These investments totaling at over $350 million account for only a handful of this year’s venture capital investments in alternative lending platforms.

Banks are Beginning to Participate in the Game
Speculation over what will happen to the banks has been a hot topic for discussion this year at FinTech conferences – The recurring question has been: are the banks becoming irrelevant?  The answer is no, banks are an important player in the current and future alternative lending landscape, through the understanding that the alternative lenders are not competitors. There is a real opportunity for collaboration that will lead to mutual growth. The emergence and growth of alternative lending to businesses resulted in a real gap in the market. With increasing capital requirements from banks coming from Basel 3, banks are more careful in their allocation of capital, and that results in more scrutiny in their choice as to whom to lend and at whit what conditions. Since 2008 we have seen a decline in banks facilitating business loans in the range of up to $500,000. The reason is simple, the costs of processing a $100,000 loan is comparable to that of $1 million, but with a lot less profit[1].

A few pioneering examples of such collaboration can be seen in recent announcements. JP Morgan announced[2] that they signed a partnership with Ondeck, to originate, underwrite, and distribute loans targeted specifically at small businesses. Santander participates in Kabbage’s $135M E round along with Reverence Capital Partners, ING, Santander InnoVentures, and Scotiabank[3]. In the UK specifically we are seeing early signs of collaborations with RBS launching a pilot to refer small businesses to Funding Circle and Assetz Capital[4].

Maturing Market
This last year we have seen a growing number of new lenders, offering a wide variety of financial products and loans terms that were unavailable to businesses beforehand. Estimations indicate that there are over 100 alternative business lenders in the market. As the market continues to mature, we are beginning to see consolidation, such as Ezbob’s merge with Everline[5], and collaborations with banks. However, more importantly, we are seeing the economy stabilize and flourish, with new sources of finance for business.

To help bring clarity to the current state of the market, Finimpact’s data analysis team has created an informative infographic mapping out world’s online alternative lending landscape.

Map of UK Alternative Lending

As 2015 comes to a close and we look back on the evolution that has occurred over the past year, we see that this is just the beginning of an amazing transformation in the alternative lending industry. The ever-increasing diversity in the lending landscape, along with greater equity and capital investment and increased collaboration from banks has to create the perfect storm for success – Alternative finance is changing the game of traditional finance for good. It’s no surprise that this is a very thrilling industry to be a part of and we are excited about what 2016 has in store!

[1] The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game, HBS, Karen Gordon Mills, Brayden McCarthy (July 22, 2014)
[2] http://techcrunch.com/2015/12/14/j-p-morgan-ondeck-and-the-future-of-alternative-lending/
[3] http://santanderinnoventures.com/kabbage-raises-135-million/
[4] http://www.finextra.com/news/fullstory.aspx?newsitemid=26917
[5] http://realbusiness.co.uk/article/29351-ezbob-and-everline-join-forces-to-create-perfect-marriage-of-finance-providers