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Alternative finance is creating a storm – and there’s thunder on the way

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The financial revolution had already been spotted before the collapse of Lehman Brothers, but it needed that night to be its catalyst. It has definitely brought about change. But while today sees hundreds, if not thousands, of so called “alternative finance providers”, we’re now heading towards further financial turmoil. We’re seeing a plethora of collapses, consolidation and even fraud – which were all too familiar in the dark past of financial services. This time, however, it’s in the alternative finance sector – the industry that promised to spearhead change in the financial world.

It’s no surprise

Let’s look at the facts. One in three startups fail within the first three years of operation. That’s a common, known fact. And it’s bound to happen in any sector that has attracted 50, 100, or in the alternative finance space, maybe thousands of businesses offering financial solutions to small and medium sized businesses seeking funding.

So why is this a problem then? Because many alternative finance providers are dealing with people’s money, in one way or another – helping investors gain a return, while aiming to fund consumer debt and help SMEs grow. And of course, because of what happened in 2007 and the following years, confidence in the banking sector remains incredibly low. Trust in financial institutions will never return to the levels they were at prior to “the crash”.

The current market

Otherwise known as fintech, the new wave of financial brands revolve around technology. Such firms allow investors to directly invest in loans to SMEs. They get a better return, while the businesses borrowing funds get access to the money more efficiently, with a tailored finance agreement which works for them, and those investing. However, herein lies the potential issues ahead. 

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Every alternative finance platform is different. Each has a different model, different teams and beliefs. Of course, there isn’t one set way of doing something and innovation relies on people thinking and acting differently. But in the world of finance, you need experience to do the right thing – and to build trust.

Having trust means you can not only pull together a solution that works for the borrower, but you can also help protect investors from losing any money because the age of alternative finance still carries an element of risk but hopefully a more transparent one.

What’s the sector doing about threats?

We’ve worked with the government and the regulator to help them understand and see the benefits of alternative finance. And in all honesty, we believe that the regulators “light touch” and guidance approach is playing out well here in the UK with risks well managed overall and lenders getting a fair return for the risks they take while businesses achieving sensible loan interest rates even where the banks won’t lend due to lack of capital.

Internationally, the “alternative finance” sector hasn’t had such a straightforward path so far, with issues of fraud and foul play appearing too often recently. Hopefully, much of this bad practice has already been stamped out, but we believe the sector still has plenty of growing up to do before it can have a better reputation than banks.

Fundamentally, we’re not so much alternative finance providers as old school lenders that understand money, how businesses work and only lend out money we have, not many times over as banks do nowadays. We also remember the days when banks were there to look after money, make it grow and put it to good use for businesses. The sector is now seen as “alternative” but really, it’s the way it always used to be, and the way it should have remained in the decades before the recent credit crunch.

A blending of traditional finance with modern methods is where alternative finance will find the right balance to deliver SMEs and business owners a storm free future.

Stuart Law is co-founder and CEO of Assetz Capital.

Meanwhile, we took a look at how, on the surface, HSBC’s announcement of its largest funding commitment to date for UK SMEs may seem astounding given that banks have been lending less to small businesses – hence the rise of alternative finance. 

Image: Shutterstock

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