Why debt crowdfunding platforms must evolve to support scaling businesses and rejuvenate a tired crowd
Setting the global benchmark for alternative finance, Britain’s effective embrace of peer-to-peer lending platforms has secured debt crowdfunding as one of the leading sources of non-institutional growth capital for SMEs.
In the five years since its inception, debt crowdfunding has supported thousands of young businesses in their evolution, from start-ups into established small to medium sized enterprises, with the sector facilitating £881m worth of debt-based transactions in 2015 alone.
While this is a remarkable achievement, the sector is no longer fledgling – its maturation coupled with the unprecedented rate of growth of the overall alternative finance market means that peer-to-peer lending platforms must likewise evolve.
Recent figures released by Nesta predict that debt crowdfunding could be worth more than £12bn a year within a decade; this is over 12 times the current size of Britain’s debt crowdfunding market. To achieve this level of growth, peer-to-peer platforms need to scale-up and upgrade their existing infrastructure so they are in a position to meet future business demands for capital and, equally, the crowd’s appetite for SME investment.
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Last year, David Cameron pledged to fill a £1bn funding gap preventing the growth of UK SMEs – a gap fuelled in no small part by institutional lending reducing at a rate of £5.7m a day.
Subsequently, a burgeoning collective of growing businesses – supported in their infancy stages through debt crowdfunding – now find themselves in a state of limbo, too small to access already reduced lines of institutional funding, but requiring financial sums too large for crowd-backed platforms.
This funding black hole is something IW Capital and Crowdfinders are attempting to address through Race to Scale – a £100m drive to support British scale-ups. While this has proven to be a timely and popular initiative, more needs to be done. An overhaul of debt crowdfunding platforms is required to ensure the biggest segment of the alternative finance industry for SMEs fully supports the companies it was conceived to help.
For peer-to-peer platforms to be in a position to assist businesses as they scale, debt crowdfunding platforms have to increase the amount of capital they can handle by recalibrating their infrastructure to reflect the changing demands of businesses and the ever-evolving profile of the crowd.
Now, the crowd is less dynamic and much more reticent, with the majority of investors sitting on their hands and awaiting returns from a portfolio they assembled during preliminary stages of the crowdfunding era – typically amounting to between eight and ten companies.
As such, platforms must increase their capacity to manage an injection of “leader funds”, the majority of which can only be sourced from deep-pocket investors or institutional backers such as hedge funds and family offices. It is these investors and institutions that have the confidence, financial capacity and speed to catalyse movement in the debt-space.
Crowd-backed finance remains of paramount importance; however, without refreshed movement, we run the risk of market stagnation from an exhausted model. Peer-to-peer platforms should not over-emphasise the role of institutional funding but see it, rather, as a peripheral force that can provide much needed assistance to rejuvenate the crowd and open up new debt crowdfunding opportunities.
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In 2015, over a quarter (26 per cent) of all P2P business loans were funded by institutions, while 45 per cent of alternative finance platforms reported some institutional involvement.
Overall, the introduction of larger-scale investment within the debt crowdfunding scene has proved positive, enhancing the due diligence and risk management capabilities of the existing structure. However, there are limitations in terms of the amount of capital an average platform can handle from institutional funds, with scalability to viable SMEs representing one of the largest hurdles.
Offering an efficient entry point that marries crowd and select institutional backing, complemented by the speed and fluidity of the crowdfunding model, is most definitely a marker for growth, ensuring smaller lenders and individual investors are incentivised as opposed to pushed aside.
Doing so will make sure debt platforms are geared to manage the current and future demands of a rapidly scaling community of SMEs, heavily reliant on increasingly powerful methods of alternative finance that remain agile and democratic in their approach.