Alternative finance and business growth

Nida Broughton
(Previously Social Market Foundation, now Behavioural Insights Team)

nida.broughton@bi.team

Behavioural Insights ltd

What is alternative finance?

Debt
Equity
crowdfunding /
crowdfunding
peer to peer

Examples: Examples:
Crowdcube, Funding Circle,
Seedrs Ratesetter

2015: 2.8bn gross

lending on online
platforms

British Business Bank, Small Business Finance

Markets, 2015-16

Behavioural Insights ltd

Why look at alternative finance?

Question: Can new sources of finance help fill the finance gap for
SMEs?

.Maybe

- Key structural problem information asymmetry

- But, may help SMEs by expanding market

Implications for policymakers

Behavioural Insights ltd

What we did

Ideally want to look at whether alternative finance can help increase business
growth

Focus on understanding characteristics of firms that use alternative finance to

help develop an understanding of whether it fills gaps

How do firms that use alternative finance differ from those that do not?
To what extent does alternative finance compete with or complement traditional
sources of finance?
Are indicators of likely future business growth associated with use of alternative
finance?

Behavioural Insights ltd

What we did

In most of what follows, we are comparing:

1. Crowdfunded firms: businesses that say they are currently using peer-to-peer
lending or equity-based crowdfunding

2. Non-crowdfunded firms: businesses that say they are currently using finance, but
are not using peer-to-peer lending or equity-based crowdfunding

3. Non-finance using firms: businesses that say they are not currently using finance

4. All firms: all firms included in the dataset

Behavioural Insights ltd

Business demographics

Breakdown of crowdfunded firms by sector Breakdown of firms by legal structure

100%

90%

80%
22%
26%
70%

60%

50%

40%

30%

27% 20%
25%
10%

0%

ABCDEF - Production and construction

GHI - Transport, retail and food service/ accommodation
JKLMN - Business services
PQRS - Other services
Sole proprietorship Company Partnership Other

Behavioural Insights ltd

Does crowdfunding fill gaps in the market?

Proportion of firms using different types of finance

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Behavioural Insights ltd

Does crowdfunding fill gaps in the market?

Success rates in obtaining different types of Proportion of all firms and crowdfunded firms
finance in previous 12 months using different types of finance
70%
Equity finance
60%
P2Pdebt
50%

Commercial mortgage 40%

Other finance 30%

Public equity 20%

Loans 10%

0%
Bank overdraft

Other finance
Credit cards

Mezzanine finance

Public equity
Bank overdraft

Commercial mortgage
Leasing or hire purchase

Other loans
Charitable/Trust/Grant
Equity finance (exc crowdfunding)

Factoring/Invoice discounting

Government schemes
Loan from a bank, building society
Government schemes

Credit cards

Factoring/Invoice discounting

Charitable/Trust/Grant

Leasing or hire purchase

All firms Crowdfunded firms

0% 20% 40% 60% 80% 100%

Note: debt P2P only Behavioural Insights ltd

Crowdfunding and business growth indicators

Proportion of firms innovating in the last three years

60%

50%

40%

30%

20%

10%

0%
New/improved goods New/improved services New/improved processes

Crowdfunded firms Non-crowdfunded firms Non-finance using firms All firms

Behavioural Insights ltd

Conclusions

Crowdfunded firms tend to be already well-served by the lending

market.

Crowdfunding may be friendly towards specific types of investment,

such as research and development spending.

Crowdfunding may be less accessible (or at least perceived to be less

accessible) for certain groups of businesses compared to mainstream
lending

Behavioural Insights ltd

What would be useful to explore next?

With my old SMF hat on

- Tracking firms over time to explore whether crowdfunded firms grow

more quickly
- Exploring dynamics of finance choices over time

With my new BIT hat on

- How well the market is working in assessing the risk and return on
investments
- How firms make decisions on access to finance and whether they
make the right choices for them

Behavioural Insights ltd