Alternative credit platforms are gaining favour among businesses who feel disenfranchised from the traditional banking sector.

One indicator of a growth segment is its ability to attract investment. According to data from Fintech Global, European lending technology start-ups attracted €200m in venture capital funding last year – more than 10% of total fintech funding for 2022.

There is considerable research to suggest marketplace lending increases the quantity of entrepreneurship (particularly in more regionally disadvantaged areas) with the effects being more pronounced for less experienced entrepreneurs, smaller and less profitable firms, firms more dependent upon external finance, and in industries with lower sunk costs of entry.

The current economic climate has done nothing to reduce businesses’ enthusiasm for this type of funding.

Iwoca’s latest expert index – based on insights from UK brokers who collectively submitted more than 2,000 applications for unsecured finance on behalf of SME clients in December 2022 – found 82% reported reduced appetite from the major banks to fund SMEs, whilst a similar proportion (79%) predicted that demand for small business finance would rise in 2023.

Half the brokers surveyed reported that more of their clients’ applications for finance were rejected in December 2022 than in the previous month.

“As big banks reduce their risk appetite and SMEs are faced with higher costs, access to finance becomes even more vital to keep businesses on track,” says Iwoca Chief Credit Officer, Mark Richens. “Embedded finance through marketplace lending makes it easier and faster for small businesses to access the funding they need.”

The ability for businesses to test markets and raise capital is necessary at a time when traditional lending institutions may not be accessible suggests Prath Reddy, President of private credit deal facilitator Percent.

“Companies that are seeking smaller quantums of debt capital are typically attracted to marketplace platforms because they don’t qualify for bank financing, their deal size is too small to hire a broker/banker, and/or they have a more ‘do-it-yourself’ mentality,” he says.

Having a network of prospective lenders, investors, and underwriters to be able to approach as a relatively small business can provide business owners a competitive advantage against their more ‘capital starved’ peers, adds Reddy.

Rob Bailey, Founder of Swallow Hill Homes has taken out hundreds of loans with Iwoca since his first application in 2015. He says this funding has helped with cash flow management from one construction project to another, allowing him to buy in new resources for future jobs.

“I used to have an overdraft, but the bank took that away during the credit crunch,” he says. “Having funding I can just turn to at very short notice is really handy. When you request the money it hits your bank instantly. If I get up in the morning and have to pay an invoice, rather than having to go through a load of processes I can just pay the person and forget about the job.”

According to Reddy there are a number of factors businesses should consider when deciding whether to access funding through a marketplace lender. These include:

• The cost of the financing.
• The amount of funding available.
• The level of disclosure required (both upfront and ongoing).
• How borrower-friendly or investor-friendly the deal structures are.
• The sophistication of the end investor.

Other considerations include the length of time the application and the decision process will take; whether there are fees or extra costs associated with the loan; and the flexibility of the loan’s payment plan.

“Businesses should also consider how easy the process is for them to take out the funding,” says Richens. “For example, will they have to go between the marketplace and the lender, or will it all take place in the marketplace where they applied?”