Small Talk: Alternative finance must get over the final hurdles and be alternative no more

There's an opportunity for the sector to establish itself as a genuine rival to the banks

If 2015 was the year when alternative finance went mainstream then 2016 offers the promise of a different type of breakthrough – an opportunity for the sector to establish itself as a genuine rival to the banks as a provider of small business funding. And there is every reason to think it can and should play this role, particularly given the stranglehold the UK’s biggest banks continue to hold over their customers, despite the emergence of several new banking services focused on small firms.

First, the context. New data from the Liberum AltFi Volume Index shows that lending to businesses from crowdfunding platforms last year totalled £1.26bn – a 75 per cent increase on 2014. Firms raised a further £333m from online invoice finance, up 32 per cent on the previous year, as well as £125m from equity crowdfunding, a rise of 134 per cent compared with 2014.

Liberum’s index also shows how broad-based the alternative finance sector has become, with almost 20 providers generating funding for businesses last year. The smallest players in the market raised several million pounds each, but the total amounts raised by the sector leaders were far larger.

That was last year, however; the question now is how quickly alternative finance providers can build on this very solid base.

The launch of the Innovative Finance Isa in April will certainly help. For the first time, investors making loans to small businesses via crowdfunding platforms will be able to hold those loans within the tax-free wrapper of an Isa – worth more than £15,000 a year – and this could provide a huge boost. It’s not just the allure of tax-free returns but also, potentially more importantly, the credibility bestowed on the sector by Isa status.

Another positive is the Government’s plan for a statutory referrals scheme. This will require banks that turn small businesses down for finance to refer them to the alternative finance sector instead. 

The first flotation of an alternative finance provider could take place this year – a further fillip for the sector in being taken more seriously. LendInvest has said publicly that it is moving towards an IPO – albeit with no clear timeline in place – while Funding Circle isn’t far away either. Zopa is another possibility.

Against that, there are hurdles to be overcome. For example, the small print of the Innovative Finance Isa is still to be resolved and the initiative is not without its complications – in particular, equity investments are excluded. 

As for the referrals scheme, it has been a long time coming. The Treasury first promised this initiative two years ago but has moved at a snail’s pace. Several platforms were shortlisted for inclusion in the scheme last summer, but since then the trail has gone cold.

Some in alternative finance are also concerned about authorisation. Full-scale regulation of alternative finance came into force last April and has given the sector an important story to tell about investor protection. However, many platforms are still operating under permissions granted by regulators on an interim basis; full permissions seem to be taking an age.

These are niggles rather than fully fledged problems, but they are challenges that need to be resolved if alternative finance is to fulfil its potential. After all, the ambition of the sector should be for small firms not to think of it as alternative at all.

Turning waste into energy and powering on to market 

A renewable energy company that generates power from palm oil wastage will today announce it is floating on AIM, the junior stock exchange. Green & Smart has a 30-year track record of treating waste water generated by the rubber and palm oil industries in Malaysia, but has recently won contracts to provide energy from the biogas captured during the treatment programme.

The IPO will generate the capital needed for the company to bring existing projects to fruition and develop its pipeline of new contracts in a sector where margins are high and investors get some protection from the support given by governments to alternative energy providers. In the case of Malaysia, Green & Smart sells electricity under a system of 16-year feed-in tariffs.

The company is already profitable and the market in Malaysia is large, given the size of the country’s palm oil industry; recent government legislation that requires all new plants to include biogas capture facilities will also provide important impetus for this burgeoning industry.

At £255bn and counting, late payment is still lethal

The total amount owed to small firms in late payments has now reached £255bn, new data shows, with more than one in two small and medium-sized enterprises owed money by customers that have failed to settle bills on time. The insurer Zurich said its research suggested many businesses faced financial ruin because of the problem.

Zurich found that one in five firms are owed more than £25,000 in late payments, while one in 10 are owed more than £100,000. In the most extreme cases, it said more than 40,000 SMEs were owed in excess of £1m. Two-thirds of the businesses surveyed by Zurich said late payments were leading to some companies going out of business.

Jason Eatock, head of SMEs at Zurich, said: “We have been warned about a cocktail of threats to the economy, and small businesses will need all the capital at their disposal to weather this potential storm. 

“In an uncertain economic climate, it is imperative that SMEs receive the support and guidance they need to adequately address the central concerns threatening the viability of their businesses.”