19th October 2018

Thriving SMEs to bolster growth of alternative finance

A 2018 OECD report has shown that alternative investment companies are thriving, as increasing numbers of small and medium-sized businesses (SMEs) turn to alternative finance as opposed to traditional bank loans to cover their costs. The report also shows that just 6.5 per cent of SMEs using alternative finance methods file for bankruptcy.

The countries with the highest number of SMEs borrowing from alternative finance providers are China, the US, and the UK. In the US, SME owners between the ages of 18-36 are most likely to turn to alternative finance to fund their business. Meanwhile in the UK, 99.9 per cent of private sector businesses were SMEs, which made up 60 per cent of all private sector employment with 16.1 million employees.

Whilst the growth trajectory shows alternative finance to be thriving amongst SMEs, this type of investment has been criticised for too little transparency and the difficulties involved in carrying out due diligence procedures on lenders and borrowers. This is based on the statistic that between 10 per cent-20 per cent of individuals who turn to alternative finance for a short term, default on their repayments.

As the alternative financing sectors seek to improve its image in parallel with its growing positive reputation amongst SMEs, a number of alternative finance providers are clamping down on who they lend to, with some electing to only offer loans to SMEs and bypass personal loans all together.

Martin Liberts, Debitum Network co-founder, said: “We believe that by focussing solely on SMEs and working alongside best practices such as due diligence methods and KYC/AML procedures, we will see any unfortunate stigmas surrounding alternative finance disappear in the future. The lack of questions surrounding our industry will then reflect the true, healthy relationship between alternative finance and SMEs.”

The trend of SMEs turning to alternative finance providers shows no sign of slowing down, and their reputation as a favourable source of finance amongst SMEs is unlikely to stop. However, it is down to providers to implement stricter due diligence procedures on individuals seeking loans to improve the reputation of alternative finance on a greater scale.