Business First Summer 2017 Business First Magazine Summer 2017 | Page 40

ULSTER UNIVERSITY BUSINESS SCHOOL
SME FINANCE: WHAT’S THE
ALTERNATIVE?
by Mike Pogue, Senior Lecturer, Financial Services Business Development, Ulster University Business School
erhaps the simplest definition of
alternative finance is that originating
from outside the traditional banking
sector. In light of the apparent reluctance of
the banking sector to lend in the absence of
liquidity subsequent to the financial crisis,
alternative finance has attempted to fill the
vacuum created.
Although the financial crisis is probably
regarded as the primary watershed in the
development of alternative finance, it could
be argued that Zopa was the original
disruptor in 2004.
Zopa’s premise was simple, borrowers
were being charged high rates by the banks
but depositors were being offered low rates,
so there was a market between these rates
and P2P (Peer­to­Peer) lending was born.
Other forms of alternative followed P2P,
most notably crowdfunding, asset based
finance, mezzanine finance and community
shares.
P
38 www.businessfirstonline.co.uk
Peer­to­Peer Lending
Peer­to­peer lending almost exclusively
dominated the alternative finance market
post 2007 and ten years later still accounts
for around 80 per cent of the market.
However the type of lending has changed
during this period from almost exclusively
P2P consumer lending towards P2P business
lending of which a significant portion is based
on real estate. The operation of the P2P
market is illustrated in Figure 1 below.
The efficient functioning of the P2P lending
market depends on the role of a platform to
fulfil the role of intermediary between the
consumer and the borrower. The platform
market is dominated by a small number of
large platforms (Zopa, Funding Circle,
Ratesetter).
The attraction to investors is the
significantly higher interest return on offer,
often six to eight per cent, in contrast to the
typical 1.5 per cent currently available on
QUOTABLEQUOTE
Businesses are increasingly
being affected by lengthy
waits for payment over and
above the standard 30 days.
This problem is more acute for
smaller businesses; businesses
with a turnover of less than
£1million now wait an average
72 days for payment.
Mike Pogue