Alternative sources of funding have gained traction, market share, and both public and professional acceptance in the aftermath of the financial crash of 2007/08.
This trend has been particularly marked over the past three to four years and continued into 2017 with, for example, the flow of peer-to-peer (P2P) lending across the country accelerating to almost £1 billion in the first half of 2017, representing a doubling in volume compared to the two previous years.
When one researches the P2P sector you enter a world of confusing and sometimes contradictory articles and messages. On the one hand you can read of reduced returns, a greater focus on defaults and signs of further scrutiny from the City watchdogs. On the other Funding Circle, one of, if not, the UK’s biggest peer-to-peer lending platforms, is preparing to hire advisors to oversee a London stock market flotation, and the most recent HMRC data shows that the uptake of the Innovative Finance ISA hit £17m in the last financial year.
With an ever-increasing number of P2P lenders receiving ISA authorisation, the expectation from the industry is that these figures and funding levels are set to rise again in 2018.The UK Government has been keen to bolster the alternative funders with a number of measures, including the establishment and licensing of Challenger Banks, the maturing of the Business Growth Fund, lending money into P2P lenders via the British Business Bank, and establishment of the Bank Referral Scheme.
Regional experience of the previously termed Challenger Banks is that they appear to be gaining increasing traction and the Business Growth Fund has become a significant player in regional sectors of the Private Equity market. It is difficult to draw any clear conclusions at this stage on the available data regarding the impact of the Bank Referral Scheme. However, the fact that over “8,100 businesses have been referred under the scheme, with more than 230 SMEs drawing down over £3.8m in finance” is a positive sign of progress. It means that businesses, which may have previously failed to raise finance, now have a formal right of referral.
Potential equity investments into South West businesses will receive further boosts in 2018 as supply side factors, such as the raising of the limits for Enterprise Investment Scheme fundraising, boost private sector and institutional investment. As has been commented elsewhere, institutional and Venture Capital Trust-backed Private Equity funds continue to have capital to invest and show increasing levels of interest in the South West. On the demand side we are noticing a growing interest from companies across the South West to consider equity investment and note a number of initiatives across the South West to further stimulate interest. One initiative I know the Cornish business community are following with interest is the proposed Cornwall Fund due to be launched later this year, managing equity and debt.
It may be surprising that the Deals Review Experian-based statistics indicate that during 2017 banks funded a smaller proportion of the South West’s deals. From a supply perceptive the feedback from the main UK banks is that they continue to have a strong appetite to lend. We are beginning to see the initial impact of the structural ring-fencing of our banking industry with banks reviewing certain sectors with greater scrutiny and a slight increase in loan pricing. From the demand side corporates themselves have strengthened their own balance sheets and have used their own cash war chests to fund transactions. This is along with a growing trend for entrepreneurs to at least part fund MBO transactions through retained funds or vendor loans rather than increased levels of bank gearing. That said, I am wary of declaring this a watershed year in terms of the banks as many have indicated that 2017 was a bumper year of lending across the South West…
In a future that will see Brexit, the continued proliferation of funding sources and the increasing impact of technology, be that via Artificial Intelligence or platforms such as Blockchain, it is difficult to make predictions. One prediction I feel I can make is that for businesses seeking to raise finance, there will continue to be a strong correlation between the level of preparedness and professionalism with which the proposal is presented to potential funders and the rate of success.