Peer-to-peer and crowd-based funding has been one of the most remarkable growth stories in finance over the past 10 years.

Funding Circle, which listed on the stock market last year, and Ratesetter, have lent billions to SMEs, while platforms such as Crowdcube and Seedrs have helped young companies secure the equity funding they need.

Such platforms are still best suited for earlier stage companies and struggle to deliver the more significant funding that businesses seeking to scale need.

And the current Financial Conduct Authority (FCA) probe into P2P lending is casting a shadow over the sector.

Even though concerns are rising with regard to P2P and crowdfunding, early-stage businesses and those seeking to scale up are fortunate in that there have probably never been more funding options available for them to consider, from challenger banks’ interest in lending to growth businesses, to venture capital and debt funds, private equity, as well as dedicated SME debt funds.

Why P2P lending has grown in Britain

SMEs are vital to the British economy, making up 99pc of all businesses and 47pc of UK revenue. Yet they continue to struggle to obtain loans from banks more than a decade on from the financial crisis. Lending to small businesses remained static last year with data from UK Finance showing £7bn was advanced in the third quarter of 2018 compared with £7.1bn in the previous quarter. Data from the British Business Bank (BBB) also shows that £4bn in loans applied for by SMEs is rejected by banks each year.

It is against this backdrop that alternative lending platforms have grown.

Since it launched 14 years ago P2P lender, Zopa has advanced loans worth over £4.0bn. It recently announced plans to launch a bank.

Funding Circle is the leading P2P platform for business loans and advances loans up to £1m, while Crowdcube has had £500m invested through its platform.

The attractiveness to SMEs is clear: they are able to source funding efficiently and quickly without the administrative burden often imposed by mainstream banks.

What the FCA probe means for P2P lending

Ultimately both P2P lending and crowdfunding are still young sectors and most P2P loans, even with the largest P2P platforms such as Zopa and Funding Circle, are unlikely to exceed £2m. This makes them suitable for companies of a certain size: typically, smaller companies at an earlier stage of growth. There are also concerns over the liquidity of P2P lenders, which have come under pressure from rising loan defaults attracting the attention of the FCA, which last year announced a review of the sector.

Zopa’s expected default rate for 2019 is 3.77% (2018 = 3.56%, 2017 = 4.52% – “Expected defaults at origination”). You can see their full data sets on Historical Performance on returns and default rates here.

P2P platforms, while regulated by the FCA, do not fall within the scope of the Financial Services Compensation Scheme (FSCS). The FCA considers P2P lending platforms pose a higher investment risk and may not suitable for mass affluent retail investors. Among the recommendations the FCA is considering is for direct financial promotions to be limited to high net worth investors and that no more than 10pc of net investible portfolios are held in P2P investments.

Finally, because they are very visible platforms, if P2P lenders and financiers do struggle to meet their financial obligations, it will be more damaging reputationally as they operate in a very public forum.

5 places to turn to for growth-stage funding…

Among the options for early stage businesses are venture capital trusts (VCTs). Last year saw a £731m raised for new investment in SMEs in the 2018/19 tax year, according to figures from the Association of Investment Companies (AIC), the second highest figure on record.

Venture debt also provides growth companies with funding if they want to avoid giving up any equity and can extend the cash runway of a start-up company to achieve the next milestone while minimising equity dilution for both employees and investors.

Private equity is another popular alternative for ambitious companies, which have a track record and are seeking growth capital or funding to back a management buyout. PE funds have significant capital available to deploy within Europe, of around at $140bn (€125bn).

A deeper debt option than venture debt is the SME debt fund sector, which take investment from a range of institutions, family offices and high-net-worths. Direct lending funds focused on Europe raised £15.8bn in 2018, bringing the capital available to lend to £34.5bn at the end of the year.

Another deep source of potential funding are the corporate venturing arms of large corporations, with some of the biggest globally being Google Ventures Salesforce Ventures and Qualcomm Ventures, while in the UK BP, Barclays and Santander are particularly active. For example, Santander InnoVentures is Santander’s $200 million corporate venture fund and the fund has invested in 23 portfolio companies since launching in 2014. Typically, such organisations can provide, early-stage, seed and expansion funding.

…AIM still Europe’s top destination for growth funding

Of course, for growth businesses which have reached a certain size and scale the Alternative Investment Market (AIM) remains a vital source of funding. It remains Europe’s top destination for fast-growing firms looking to go public. In 2018, it was responsible for 59pc of the funding secured by growth companies across European bourses, raising £5.5bn across 398 separate deals. This compares well with £17.7bn for the main market in London. AIM has continued to evolve since its inception, catering for more mature businesses too. But it still maintains its original function as a source of funding for scale-ups, which is why, after 24 years, it remains Europe’s top destination for fast growing innovative firms.

Grant Bergman is head of the private division at FinnCap

Further reading

My 6-point plan for enhancing regional funding across Britain