By Will Larwood, GapCap
As mentioned in GapCap’s previous blog “Shaking off the ‘Alternative’ tagline” one can clearly see that the alternative finance market is growing significantly, with growth continually doubling in size year on year since 2012 and predicted growth in 2015 to reach £4.4bn. This is fantastic news for small businesses as they are able to gain access to finance that is simpler and cheaper than that of a traditional bank loan. Yet as this market continues to grow, one must be wary that it could mutate into a younger model of the traditional lending methods that businesses, in particular SME’s have loathed. The very foundations of the alternative finance market were built from the unfair, time consuming, inflexible and high cost packages that traditional finance providers, many of them banks, offered. Key features such as flexibility and speed were and still are the main attractions for business and corporations seeking finance.
Paul Mildenstein, Chief Executive Officer at Liberis (www.liberis.co.uk/author/paul-mildenstein/), discusses the actions and standards that alternative providers musts maintain to refrain from mutating into the above.
1) Simplicity: Simple products and processes that are clear and transparent for the borrower.
2) Suitability: Alternative providers do not sell SME’s a product that is not optimal for the growth of the business at this point in time. An equity raise is probably not suitable for short term financing.
3) Access for all: Funding applications free of charge, with no monthly or annual fees that ties borrowers in for significant periods.
4) No ties: Finance providers should have no other ties with other products and services that are on offer.
5) Modern Underwriting: Funders should analyse up-to-date accounts, directors and business plans and information models to determine credit scores and approval for funding. Using advanced technology this will also prevent the biggest flaw in the industry, fraud.
6) Education: Linked with the first two points, education provides the borrower with the understanding of the products they are being sold and the suitability for their business needs. Education continues to grow significantly as the ‘alternative’ finance market becomes mainstream.
7) Regulation: A clearly defined set of regulations must emerge for such an unregulated market to ensure dishonest lenders do not take advantage of naïve borrowers. Fines, penalties and public shaming must all be introduced to deter such events from happening.
As long as integrity remains and bank finance remains arbitrary, rigid and inaccessible this should prevent the young prince turning into the tyrant he so recently usurped.