09 Jul Understanding Alternative Finance
The alternative finance market in the UK is expected to grow to £1.74 billion of funding provided in 2014. Alternative finance covers a variety of new financing models that have emerged outside of the traditional financial system, that connect fundraisers directly with funders often via online platforms or websites.
As highlighted in this report, the UK market is growing rapidly, and has more than doubled in size year on year from£267 million in 2012 to £666 million in 2013 to £1.74 billion in 2014. In the process, it has given individuals more control over their money as well as new outlets to invest or donate it. At the same time entrepreneurs, SMEs, charities and community organisations are obtaining much–needed finance, which they in many cases, would not otherwise be able to secure. It is evident from our research that the alternative finance market is contributing to the growth and vitality of the UK economy as well as having a positive social impact on philanthropic giving and volunteering.
However, while the market is racing ahead, growing in the number of individuals and ventures funded, the amount of total finance raised, and the number of businesses operating in the alternative finance industry, research has lagged behind.Beyond the size and growth of the market, we actually know very little about alternative finance and the people who are using it to fund or fundraise for projects and ventures. Unanswered questions include:
• What type of people and organisations use the different alternative finance models?
• Why do people and organisations seeking money turn to alternative finance platforms?
• What makes the model attractive to people with money to donate, lend or invest?
• What is the socio–economic impact of alternative finance and how do organisations and businesses perform after fundraising on alternative finance platforms?
• How do people find out about various alternative finance models and what do they think of them having used them?
There exists lots of anecdotal stories from fundraisers and funders of projects and ventures, and some data from platforms that begins answering some of these questions, but none of them look at alternative finance holistically in the UK or try to systematically analyse trends and examine behaviour across multiple alternative financing models.
To address this shortcoming, this unique study will shed light on the thriving alternative finance industry in the UK. Furthermore we hope that by studying one of the most dynamic, innovative and diverse markets of its kind in the world we can provide insights for individuals, businesses, governments and regulators both in and outside of the UK on the mechanisms, processes and impact of the alternative finance market.
This study uses extensive transaction data collected from alternative finance platforms as well surveys of their users, and we are very grateful to the UK alternative finance industry for their support.
As noted earlier alternative finance is an umbrella term that covers a range of very different models from people lending money to each other or to businesses, to people donating to community projects and businesses trading their invoices. The distinctions between these models are important as they differ enormously in the types of people and organisations that use them, why they use them and the nature, form and amount of financial transactions that take place.
Peer-to-Peer (P2P) Business Lending
Debt-based transactions between individuals and existing businesses which are mostly SMEs with many individual lenders contributing to any one loan.
Donation-Based Crowdfunding
Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return in exchange.
Invoice Trading
Firms sell their invoices at a discount to a pool of individual or institutional investors in order to receive funds immediately rather than waiting for invoices to be paid.
Peer-to-Peer (P2P) Consumer Lending
Individuals using an online platform to borrow from a number of individual lenders each lending a small amount; most are unsecured personal loans.
Community Shares
The term community shares refers to withdrawable share capital; a form of share capital unique to co-operative and community benefit society legislation. This type of share capital can only be issued by co-operative societies, community benefit societies and charitable community benefit societies.
Equity-Based Crowdfunding
Sale of a stake in a business to a number of investors in return for investment, predominantly used by early–stage firms.
Reward-Based Crowdfunding
Individuals donate towards a specific project with the expectation of receiving a tangible (but non–financial) reward or product at a later date in exchange for their contribution.
Pension-Led Funding
Mainly allows SME owners/directors to use their accumulated pension funds in order to invest in their own businesses. Intellectual properties are often used as collateral.
Debt-Based Securities
Lenders receive a non–collateralized debt obligation typically paid back over an extended period of time. Similar in structure to purchasing a bond, but with different rights and obligations
Read the complete report of this study here
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