Alternative financing models such as crowdfunding, peer-to-peer financing and invoice trading are no longer at the fringes of the financial sector. Increasingly, these and other newly established financing vehicles are rapidly becoming mainstream options for entrepreneurs looking for more innovative and flexible ways to finance their growth.
According to a 2015 study by University of Cambridge and EY, the growth rates of some alternative financing options have been particularly impressive and look set to accelerate. In Europe alone, transaction volumes via alternative finance platforms grew six-fold in three years and were expected to surpass €7 billion (US$7.9 billion) in 2015, making alternative financing more accessible to early-stage businesses.
Necessity: the mother of invention
The 2008-09 financial crisis accelerated the development of alternative financing. Its immediate effect was to cause many of the developed world’s banks to cut back on their lending, particularly to early-stage businesses. The introduction of new bank capital regulations added further momentum because banks were forced to focus on building up large capital reserves instead of lending.
When EY surveyed entrepreneurs in G20 markets 2012, three-years after the crisis, two-thirds were still encountering difficulties accessing finance, with the funding gap felt particularly acutely by start-ups seeking pre-seed and seed funding. While other funding options remained for early-stage businesses – such as investment from friends and family, business angels and early-stage VC – demand for new, more flexible, forms of finance was emerging.
Since then, entrepreneurs have increasingly found alternative sources of finance offer the flexibility they need to support their plans to accelerate growth. As a result, demand for alternative finance has grown quickly, with nearly 10,000 SMEs accessing €385 million (US$434 million) in Europe over three years. Larger amounts of capital are also being raised, and in May 2016 the US introduced new regulations allowing start-ups to raise up to US$1m online within a 12-month period via crowdfunding.