Online lending platforms such as Invest & Fund are part of the broad adoption of non-bank financing among a growing number of both institutional and retail lenders and those seeking capital.

Looking back a decade to the state of financial markets in the nadir of the Global Financial Crisis an optimist might have hoped for a quick recession at best while a cynic might have expected an end of the whole market based financial system.

Such views, whilst understandable missed what was right around the corner: the rise of financial technology - or fintech - and alternative finance.

The rise of this disruption to traditional finance has brought new options for investors and those seeking capital amid the ‘platformification’ of markets and the rise of new business models. It has also challenged banks to their core and increasingly presents a larger threat. It was in fact several years old in 2008 but nobody predicted that it would go on to revolutionise and transform the banking landscape so rapidly.

For those unfamiliar with ‘alternative finance’ it is simply the provision of traditional funding (normally from banks) such as lending and equity raising but from non-traditional players. In the jargon banks are ‘disintermediated’ and the pace at which it has happened since 2008 has been significant, driving down the cost of capital.

So how does it work? A great example is how Invest & Fund connects two groups of people together by facilitating property development finance and bridging loans while providing returns for lenders.

On one side of the coin are experienced property developers looking to borrow capital to fund their projects. While on the other side are lenders seeking to lend money at a rate of interest that cash cannot currently deliver but offering a lower level of volatility than equities have experienced since the 2008 financial crisis.

But there are potential downsides which must be considered very carefully. The most important point to understand is that a lender’s capital is at risk, and you could potentially lose all of your original investment. Alternative finance providers try to mitigate this risk by providing security against the property or land, but that should not be mistaken as a guarantee that your money will be returned in the event of a default.

Banks have quickly retreated from lending markets especially for smaller loans mainly owing to new regulatory requirements. Advances in technology and data also allowed these markets, previously monopolised by big banks to open up to platform-based players such as Invest & Fund.

Today, ten years on from the fall of Lehman Brothers investment bank, alternative finance platforms are booming. Low rates and the technology enabled lending ecosystem is facilitating the growth in non-bank lending and investing.

While much of the growth was enabled by the economic conditions of the post-financial crisis era, it is important to remember this period also coincided with the growth in the smartphone and a general rise internet connectivity. An important but overlooked link in the growth of disruptive finance.

So how big is ‘alternative finance’ and is it still alternative? In the UK lending volumes for peer-to-peer platforms hit well over £5bn in 2017 with 2018 expected to represent significant increases on this. During the depths of the financial crisis in 2008, volumes stood at just £300m. The broader alternative finance market is far larger still.

The financing of specialist and niches areas of lending such as the property market, for example, are quickly becoming open to all. The UK has the most sophisticated and well-developed alternative finance sector in the world and the growth of peer-to-peer lending is having an undisputedly positive effect on the UK economy. That won’t go away in a hurry.

Lenders’ capital is at risk. Remember, payments are not guaranteed if the Borrower defaults. Invest & Fund is not covered by the Financial Services Compensation Scheme (FSCS).
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Author Daniel Lanyon. Altfi Editor.