By Nicola Horlick, CEO of Money&Co
SMEs are increasingly going online for something they are not getting from the banks: finance.
Online crowdfunding platforms, which allow businesses to pitch directly to investors, are emerging as a smarter way for SMEs to get the finance they need. Lenders looking for a better rate of interest are ready to compete to fund the most credit-worthy ideas. This means that businesses are more likely to succeed in getting a loan via a crowdfunding platform – and at a more favourable rate.
It’s no wonder that many SMEs are putting their faith in the crowd. Although small and medium enterprises account for 99.9% of all private sector businesses in the UK and 48.1% of private sector turnover, many businesses are struggling to access finance.
Lending to SMEs has been falling since the financial crisis. Bank of England statistics show that lending has been down approximately 3% each month compared to 2012. As banks struggle to do enough to finance UK SMEs, many have found an alternative source of finance in crowdfunding.
While banks are failing to serve an important segment of the UK economy, the crowdfunding market is burgeoning. In three years, the peer-to-peer crowdfunding market has trebled and it could be worth over £1 billion by 2016. The sector could eventually account for £12.3 billion worth of business loans per year, according to a study by innovation charity Nesta. Clearly peer-to-peer and person-to business lending – the model on which Money&Co’s is based – has the potential to significantly boost the UK economy.
Next year, the appeal of crowdfunding will only increase. In April, the FCA will begin to regulate crowdfunding businesses, providing protections to both lenders and borrowers. Under the key proposals for loan-based crowdfunding platforms, platforms will have to ensure among other things that they talk clearly and accurately about the potential risks and rewards. The regulator will also keep a close eye on the kind of back-up plans the platforms have in place to ensure lenders are protected.
Crowdfunding can provide lenders and borrowers with more control, as well as acting to undermine the restrictive dominance of high street banks. As the economy begins to grow again, crowdfunding can inject further confidence in growth with the necessary funding.