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Does the alternative funding industry need more regulation?

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Lack of lending from banks to small businesses has resulted in the foundation of a number of alternative business funding options. From invoice finance to forfaiting and government lending schemes, SMEs are increasingly turning to these new sources as a way of growing their business.

But concerns are occasionally raised about how safe these funds can be, both as an investor and a borrower.

This weekend has seen reports of plans to regulate the crowdfunding industry by bringing it under the remit of the Financial Conduct Authority. 

In the context of business, crowdfunding usually involves offering equity in your company (sometimes along with free products and other promotions) to members of the public in return for small investments.

An FCA spokesperson says: “We believe most crowdfunding should be targeted at investors who know how to value a startup business, and who appreciate the risks involved and that they could lose all of their money.

We want it to be clear that investors in the majority of crowdfunds have little or no protection if the business or project fails, and that they will probably lose all their investment if it does.”

Industry experts say they have known about plans to regulate for a long while, and are more than happy to cooperate with the authorities.

Luke Lang, co-founder and director of crowdfunding platform Crowdcube, says: “This consultation is a positive development for crowdfunding. Crowdcube, alongside the UKCFA, is working very closely with the FCA and HM Treasury, and we’re having constructive conversations on creating a new framework which balances consumer protection with regulation that enables the crowdfunding industry to grow.

Crowdfunding can provide much needed competition into the financial services marketplace, both for businesses seeking funding and consumers seeking alternative sources of investment return. We are hopeful that this can be achieved through proportionate FCA regulation.”

Of course crowd funding is just one element of the alternative funding industry, and others have come up against scrutiny as well. Peer-to-peer (P2P) lending gives people and businesses the chance to make relatively small loans, as part of a collective, to up-and-coming firms.

Funding Circle, one of the biggest players in the P2P lending market, co-founded the Peer-to-Peer Finance Association, which offers businesses in that field the chance to sign up to its rules and operating principles.

David De Koning, their head of communications says the firm believe these principles would be a good starting point once formal regulation of the industry begins in the spring.

“We have been campaigning for formal regulation of the peer-to-peer finance industry for a long time and we’re pleased that the industry will be formally regulated from April 2014,” he adds.

It seems clear, then, that some degree of regulation should be welcomed – both by the industry itself and the SMEs that use it. 

Nick Montague of alternative finance platform FundingStore says: “If anything, this is regulation catching up with the new types of lending and investing platforms.

“Regulation gives certain safeguards, which can only be a good thing for all parties – a safer system in everyone’s longer term interest.

“But regulation doesn’t provide guarantees that a company will use investment wisely. Investing always carries a risk and both investors and borrowers should carry out the required due diligence before making any decisions.”

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