PEER-TO-PEER business lending overtook P2P consumer lending last year to become the largest segment of UK alternative finance, the biggest survey of the sector has revealed.
The fourth annual UK Alternative Finance Industry Report by the Cambridge Centre for Alternative Finance (CCAF), showed the P2P business lending market grew by 39.8 per cent from £881m in 2015 to £1.24bn in 2016.
It overtook consumer lending, which rose by 28.6 per cent from £909m to £1.17bn over the same period.
Debt-based securities platforms saw the biggest proportional increase, albeit from a lower base, from £6.2m to £79m over the year, up around 1,200 per cent.
P2P property lending was up 88.3 per cent to £1.14bn, while invoice financing grew 39 per cent to £452m.
The whole alternative investment market, which encompasses P2P, equity crowdfunding and pension-led funding, grew by 43.1 per cent to £4.5bn in 2016.
This figure is likely to be much higher now as platforms such as Zopa, Funding Circle and RateSetter have all passed the £2bn lending milestone during 2017.
Approximately 72 per cent of all alternative finance market volume, or £3.3bn in total, was raised for UK start-ups and small businesses across a combination of the various debt, equity and non-investment funding options offered by the alternative finance industry.
This was a 50 per cent increase on the £2.2bn of business finance raised in 2015.
P2P business lending volume in 2016 was equivalent to just over 15 per cent of all bank lending to small businesses in 2016, according to the report.
This is up from 11.7 per cent in 2015 and just 0.9 per cent in 2012.
The highest proportion of P2P business borrowers came from construction, which accounted for 33 per cent of all funds raised, and engineering at 22 per cent.
The average size of a P2P business loan increased from £76,280 in 2015 to £95,000 in 2016, with the average number of investors participating per loan increasing from 347 in 2015 to 640 in 2016, the report said.
Approximately 72 per cent of all alternative finance market volume, or £3.3bn in total, was raised for UK start-ups and SMEs across a combination of the various debt, equity and non-investment funding options offered by the alternative finance industry.
This was 50 per cent increase on the £2.2bn of business finance raised in 2015.
The report surveyed 8,300 investors and lenders or funders of online alternative finance, as well as 77 crowdfunding and P2P platforms, with some of the results feeding into the Financial Conduct Authority’s (FCA’s) post-implementation review.
The majority of P2P platforms surveyed deemed existing FCA regulations to be adequate, with only seven per cent stating that existing regulations were too relaxed for their platform activities.
Most respondents, 84 per cent, felt the FCA’s review was appropriate and adequate but 14 per cent believed it may lead to regulations that are too excessive and strict.
The report also looked at investor attitudes.
Investors were asked about how they understood risk, with the majority recognising that P2P was more risky than a bank savings product.
Across all models an average of 60 per cent of funders relied upon platform-led due diligence, with 38 per cent relying upon their own due-diligence and 29 per cent on the due diligence performed by ‘other investors’ utilising the platform.
Provision funds were also ranked as important by 84 per cent of investors, while fewer than half of investors, 43 per cent, said it was important to have a secondary market.
Half of investors felt tax wrappers were important but just 23 per cent said they understood Innovative Finance ISAs.
Overall, the number of investors utilising all types of alternative finance platforms increased by 131 per cent to £2.5m in 2016, jumping from 1.09m in 2015, although this could include double counting if people use more than one platform.
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The role of institutions also grew in 2016.
Retail investors made up most of the lending on P2P platforms, but funding from an institution accounted for 25 per cent of property lending, 28 per cent of business lending and 32 per cent of consumer lending, the report showed.
The five largest alternative finance platforms accounted for 64 per cent of total market volume in 2016. There were few new entrants into the market, and more than 35 UK online alternative finance platforms became inactive in 2016 through merger or closing down, the report said.
“Online alternative finance has become an ever more established component of the UK financial landscape,” Bryan Zhang, executive director of the CCAF, said.
“Progress in financial innovation is, nevertheless, not linear within such a dynamic landscape.
“As market consolidation accelerates there is greater pressure on alternative finance platforms to distinguish themselves through better services and more innovative products, whilst simultaneously responding to emerging regulatory and supervisory demands.”
Julia Groves, a partner at P2P bonds platform Downing and co-founder of the UK Crowdfunding Association (UKCFA) said it was reassuring to see that funders have a good understanding of the level of risks.
“Whilst the demographics of participants have remained largely stable, including age, gender, education, income and geographical distribution, total participants across all platforms has now exceeded 2.5m up from just over 1m in 2015,” she said.
“With 55 per cent of funders using two or more platforms, this growth is a strong indication of the sustained popularity of alternative finance.
“The UKCFA and member platforms were delighted to take part in this research, and look forward to the FCA’s considered response in the new year and to continuing our work to ensure best practices are embedded across this growing sector.”