Alternative finance (AltFi) has reached an inflexion point. The UK now plays host to more than 100 AltFi platforms, from peer-to-peer (P2P) lending to invoice finance. But crowdfunding remains the belle of the AltFi ball, capturing the entrepreneurial imagination through the glowing successes of businesses like Tossed and Pebble watch.

Considering the prominence of these platforms, it may be time to strip the sector of its ‘alternative’ monicker.

From alternative to mainstream

This may be part of the adoption cycle, according to Jeff Lynn, chief executive of Seedrs. “Alternative is becoming less and less a meaningful word. That’s what happens with anything on the internet.

“We’re 20 years or so into the mass use of the internet. We’ve seen it time and time again, going back to the advent of Amazon and eBay. I mean, buying a book online was the alternative to the ‘normal’ way of buying a book at a physical store. Now nobody would think that walking down to Waterstones is ‘normal’ and using Amazon is weird. And the same thing happens in finance, and any other space. As you get increasing adoption, you’ll see it shift from being an early-adapter, London-techy thing, to an ‘everyone using it’ thing,” he explained.

Crowdfunding is definitely becoming a mainstream form of finance. Entrepreneurs seeking funding for growth often use multiple forms of financing, Lynn added. “Some entrepreneurs are smart. They take money where they can get it, whether it’s from us, from a VC, from angels, banks. I think that’s great for the entrepreneurs, for investors and for us.”

Catalysed by inefficiencies in the banking sector

According to Chris Maule, CEO and founder of the UK Bond Network, the rise of AltFi was catalysed by inefficiencies and bureaucracies in SME banking. “In our experience, the majority of SMEs that turn to alternative finance have already sought funding through their bank. Many however become frustrated by the typically lengthy process, a lack of transparency around both timing or costs, and the rate of decline – often a knock on effect of stricter regulation and operational belt tightening,” he said.

“While research indicates that banks are now working to reverse this trend, the last eight years of lacklustre business lending has understandably left a sour taste in businesses’ mouths.”

Paul Samrah, partner at Kingston Smith explained this disconnect, drawing on findings from face-to-face interviews with the senior lending policy makers at five major and challenger high street banks, and focus groups with entrepreneurs. “Our research revealed a significant disconnect between the understanding that banks and entrepreneurs have about one another’s needs and processes.

“For example, many entrepreneurs appeared unaware of banks’ lending criteria, and the need to have a good credit rating and a realistic business plan. Meanwhile, the feedback and support that banks offer entrepreneurs following their loan decision is often unclear and inadequate. Bankers often don’t have the knowledge or experience to actually help businesses. Clearly, this mutual lack of understanding can result in significant barriers to SME lending,” he said.

P2P gains popularity

Following the financial crisis, many banks have retreated from lending to SMEs. In the void, P2P finance platforms have stepped up, providing loans at a much faster and red-tap-free rate than major banks. Additionally, P2P platforms offer lenders a higher return than many traditional investments, with interest rates in the area of 6 per cent.

£715 million in new loans were approved in the first quarter of 2016 alone, according to the P2PFA (Peer-to-Peer Finance Association).

Kevin Caley, Founder and Chairman of ThinCats, sees this as a clear indicator that the P2P sector is giving traditional lenders a real run for their money.

“The pace of growth has been consistent, with volumes almost doubling year on year, and this is just the start of it. We expect this growth to snowball,  as more platforms receive FCA approval for the innovative finance ISA,” he explained.

“The industry has gone from FinTech fantasy to established industry in only a decade, so inevitably there will be challenges along the way. However the leading peer-to-peer platforms, members of the P2PFA, have all built robust business models and set high standards to deal with this. So I have no doubt that the peer-to-peer sector will soon sit alongside other mainstream asset classes, and continue to deliver great results for investors and borrowers alike.”