Is peer to peer lending increasing entrepreneurial opportunity?

As the banks tightened their lending criteria during the recession, alternative finance went from a nascent niche industry to an economic success story. This is particularly so in Britain, where its growth outstrips the rest of Europe put together.

Both Labour and Conservatives are keen to promote entrepreneurialism as a way out of poverty or off benefits and as a wider driver of economic growth. But despite several schemes designed to support start-ups and the newly self-employed plus a surge in people working for themselves, many face difficulty in financing the type of rapidly growing businesses that provides jobs and contributes to economic prosperity.

“Too many aspiring entrepreneurs fall at the first hurdle,” says Lyndon Wood, CEO of insurance comparison site Constraquote.  “Usually if they are denied funding by the banks, their journey towards becoming an established business person ends abruptly.”

Alternative finance seems to be a godsend for cash-strapped entrepreneurs, with 50% of SMEs saying that it’s creating new opportunities, according to a survey by UK Bond Network.

Another report by Nesta shows that more than half of companies which use crowdfunding or peer-to-business finance go on to create more jobs.

However UK Bond Network’s survey shows that awareness of alternative finance is worryingly low among the smallest businesses – raising the prospect that some of those entrepreneurs who might benefit most from access to alternative sources of funding are missing out. In turn, this could compound existing inequalities including entry to business networks, digital access and the understanding of business fundamentals.

Is it really driving opportunity?

“I think it is in certain sectors, primarily those with a technological or digital focus,” says Dr Rob Dover, Director of the Glendonbrook Institute for Enterprise Development, Loughborough University in London. This is echoed by Wood, who also sees the tech sector as benefitting strongly from alternative finance.

“This is – in part – because these areas represent interesting opportunities for investment,” explains Dover, “partly because entrepreneurs in this space are usually fresh out of programmes with business content at university and so are well informed, and partly because these sectors cluster together and share information.”

However a quick look on business-oriented crowdfunding and peer-to-peer lending sites does show that there’s a sizeable representation of other industries and the biggest uptake of peer-to-peer loans is in the manufacturing sector, according to Nesta’s research.

Wood, who once lived out of his car and started Constraquote before he was 20, following a troubled time as a teenager, believes that alternative finance is buoying confidence among SMEs. “When it was announced in the latter half of last year that banks would be obliged to offer alternative funding, optimism in the business sector couldn’t have been higher.”

What are the barriers to access?

“One of the biggest issues for businesses is that they aren’t aware of the finance that is available to them,” says Wood. But it’s not just knowing that they exist that can be a problem – it’s also understanding which platforms are the most appropriate and how to approach and pitch finance proposals.

The perception that alternative finance is particularly suitable for tech businesses is another area that could do with being addressed as it could potentially create a perceived barrier for entrepreneurs in other sectors.

“Another is confidence,” says Dover. “Really I mean confidence to know that others have accessed them, and networks are important in this, and how the experience ran, so what went well and what could be avoided.”

Applying for alternative finance can require a different skill set to that needed for traditional bank loans. Nesta reports that the biggest challenge for businesses who successfully used crowdfunding was developing a marketing and social media strategy around their offer.

According to Dover, “Alternative finance appears to be working well in innovation clusters so the answer might be to scale and reframe the notion of innovation clusters outside of the flagship ones we see in London, Bristol, and Birmingham.”

He also points out that this needs to be addressed by universities too, so that their students leave fully equipped to start their own businesses.

But this may need to happen at a more grass-roots level in order to target start-ups and SMEs that are outside main innovation centres and particularly focused toward entrepreneurs from less privileged groups. This can help ensure that alternative finance widens access to funding to all those with a viable business model – not just those currently best placed to use it.

This article is published in collaboration with openDemocracy. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Sarah Willis is a business and finance writer working out of Brighton. Having worked in both the finance and business sectors Sarah now covers a range of subjects including personal and public finance, the economy and startups.

Image: Kim Keon-hoon, a worker with Byucksan Engineering & Construction, looks out through the window from his empty two-bathroom, four-bedroom apartment before an interview with Reuters, in the middle class suburb in Goyang, north of Seoul April 1, 2013. REUTERS/Lee Jae-Won.