Alternative Finance Models: A Digest
When I embarked on a career in arts management, questions of finance were quite far from my mind. After all, I wanted to work in the arts, not in banking. I didn't imagine then that such questions would ever become important, let alone interesting. This was Germany in the late 1990s... I soon realised that this was rather naïve. It is of course a truism to say that any arts organisation needs to operate a mixed economy; and neither is it surprising that our creative sector should always be looking for new models to shore up its revenue base, cover its cashflow requirements or generally explore new business models. So we learned in March that Shakespeare's Globe was preparing for a £5 million Social Impact Bond to support a new library, archive and research centre.
Other new forms of financing have been opened up through new technologies connecting organisations and businesses with groups of individual supporters or investors. Crowdfunding has become a wide-spread phenomenon. It has triggered further innovation with more traditional funders. When the now sadly defunct talent development network, IdeasTap, started its own crowdfunding platform Accelerator in 2014, it introduced a competitive element in giving Accelerator projects the chance to win a top-up out of IdeasTap's own coffers towards their fundraising goal. Crowdfunding has also speeded up the transaction process and allows for quick reactions to particular circumstances or emergencies. A recent example is BAC's Phoenix Fund, set up in response to the fire that devastated this much-loved venue in March, a campaign facilitated by the National Funding Scheme's Donate site. But crowdfunding comes in different guises – are we aware of the different types? Getting to the bottom of the possibilities offered by new technologies and platforms can be a little daunting for newcomers to this field.
As a starting point for familiarising myself with the different technology-based models, current practice and trends I found a report by Nesta and the University of Cambridge particularly helpful – Understanding Alternative Finance. Published in November 2014, it is based on a study carried out between March and September 2014. It claims to be the most comprehensive review of the burgeoning alternative finance sector to that date, and does indeed contain a wealth of information on the subject, based on
• Data gathered from various finance platforms
• Model-specific surveys of users (both funders and fundraisers)
• Two external national surveys to gauge awareness and perception (individual consumers and SMEs)
• An industry-wide tracking survey gathering actual and projecting industry figures for 2014
The term 'alternative finance' here covers a range of different models, some more applicable to the work of fundraisers than others. Their distinctive feature is the use of technology to bring together organisations with funders, investors and volunteers in ways that may well offer opportunities beyond the immediate need for raising funds, be they donations, loans or investments. It should be pointed out that it is the mechanism that is new, not necessarily the nature of the transaction.
The models or subsectors as defined in the report are:
Peer to peer (P2P) business lending – Debt-based transactions between individuals and existing businesses which are mostly SMEs with many individual lenders contributing to any one loan
Peer to peer (P2P) consumer lending – Individuals using an online platform to borrow from a number of individual lenders each lending a small amount; most are unsecured personal loans
Invoice trading – Firms sell their invoices at a discount to a pool of individual or institutional investors in order to receive funds immediately rather than wait for invoices to be paid
Equity-based crowdfunding – Sale of a stake in a business to a number of investors in return for investment; predominantly used by early-stage firms
Reward-based crowdfunding – Individuals donate to a specific project with the expectation of receiving a tangible (but non-financial) reward at a later date in exchange for their donation
Donation-based crowdfunding – Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return in exchange
Community shares – […] withdrawable share capital; a form of share capital unique to co-operative and community benefit society legislation. […] can only be used for co-operative, community benefit and charitable community benefit societies
Pension-led funding – Mainly allows SME owners/directors to use their accumulated pension funds in order to invest in their own businesses. Intellectual properties are often used as collateral
Debt-based securities – Lenders receive a non-collateralized debt obligation typically paid back over an extended period of time. Similar in structure to purchasing a bond, but with different rights and obligations
The reports sets out commonalities and differences between these models in terms of mechanisms, processes and impact.
Looking at the market overall, the report forecasts growth to £1.74 billion by the end of 2014, with year on year growth in the preceding couple of years of 150% or more. Over 7,000 SMEs will have profited from over £1 billion of growth and working capital. Peer to peer business lending is the largest subsector, with loans worth £749 million and an average growth of 250%. 70% of SMEs using this market saw growth in turnover, 63% of them growth in profit. The fastest growing sector is equity-based crowdfunding, growing on average by 410% over the period 2012 to 2014.
In 2015, the sector as a whole is projected to grow to £4.4 billion assuming the recent trends continue. The report bases this projection on the willingness of current users to engage more in this market, and on the comparatively low usage figures to date, for example, only about 14% of UK consumers have so far used at least one alternative finance model. This is both a challenge and an opportunity, as awareness is also still quite low. 42% of individual consumer respondents to the national survey were unaware of any of models considered. A further challenge is the perception of risk associated with less familiar financing models when compared with more traditional means.
In terms of usage, the study also finds that alternative finance is predominantly used by older, affluent men, a parallel to traditional finance. Women are comparatively underrepresented as users, both as fundraisers and as funders, with the exception of reward- and donation-based fundraising. This appears to be in line with the greater representation of women in social enterprises compared with traditional businesses.
Interestingly for social projects, it appears that three quarters of funders have used funds additional to their normal charitable contributions.
The report contains a multitude of interesting facts, figures and conclusions. I have merely scratched its surface in the hope that colleagues will be encouraged to engage more with a market that clearly holds much potential, particularly at times when traditional methods of financing are harder to access. I'd urge anybody with a more than passing interest in the subject to look at the REPORT itself and the related BLOG entries.
Dagmar Walz | May 2015