The UK’s burgeoning alternative finance industry has seen staggering growth year on year in 2015, and could reach more than £11bn in size by the end of this year if the current rate of expansion is maintained over the next 12 months.
With banks backing away from lending and consumers less willing to accept the rates offered on savings products, alternative finance is providing a much-needed solution for small businesses looking to raise capital.
Investors are also catching on to the opportunities the sector, which was previously the domain of the wealthy, is creating. With cash returning next to nothing, and traditional investments such as equities mis-firing, mini-bonds and other products are becoming more and more popular.
As one might expect, inflows are therefore soaring. In 2015 alone the industry is expected to have grown by 155%, hitting £4.4bn according to estimates from Nesta. If this rate of growth is repeated in 2016 the industry will have grown to £11.2bn by year end.
The chances of this happening have been greatly enhanced by the introduction of the Innovative Finance ISA. Available to savers from April, this new savings vehicle can only speed up the growth of the sector, and it will be interesting to see just what impact this has had by the end of the year.
After all, the new ISA is unlocking a £50bn-a-year investment universe, according to estimates from Tisa (The Tax Incentivised Savings Association). If even a fraction of this huge pool of money flows into alternative finance products it will swell the sector dramatically.
Even without the new ISA, alternative finance has seen such breakneck growth that it has left other investments in the shade. Total assets under management in alternative finance has, for example, already surpassed Venture Capital Trust’s, another tax-efficient product.
There are risks on the horizon. Interest rate rises – while likely to be few and far between – are definitely on the cards this year in the UK following the historic move in the US in December. This could tempt savers back into cash savings products if banks pass on the rate rises.
However, this will not become a threat for some time. When the risk-free return on cash reaches 5-6% it may become more challenging for alternative finance, but that is likely to take many years given the scale of the shock caused by the financial crisis, and the reticence thus far of central banks to normalise policy.
Alternative finance also has the advantage of being able to offer consumers the chance to invest in businesses they actually know and like, and even believe in, rather than simply see their money go into a company they have no knowledge of, or relationship with.
The importance of this social aspect of many of the successful raises should not be overlooked. Savers are waking up to this and rightly thinking why not lend directly to a company like Warren Evans if they already know and like their products, rather than put the money in some unknown equities or bonds. It is a hard argument to counter.
As more and more savers cotton on to this it is easy to see why assets invested in the sector could jump again this year.
Richard Wheat is an entrepreneur and founder of MRM, an award-winning communications consultancy.