Why the improving economy shows crowdfunding is no fad

It was hardly an auspicious time to launch a new financial product. UK crowdfunding was born in the eye of a perfect economic storm.

The Credit Crunch – in which banks effectively pulled down the shutters and stopped lending to small businesses – tipped the country into a recession that then led the Bank of England to slash interest rates to a record low.

The UK economy is now a world away from those dark days, and the IMF predicts that this year Britain will post the best growth rate of any G7 nation.

But despite the economy now having the wind squarely in its sails, the two fundamental ingredients that made the crowdfunding revolution possible are still firmly in place.

The credit conundrum behind Britain’s growth

Last week the Bank of England’s rate-setting committee left interest rates at 0.5% - the same record low level at which they have been held for five and half years. Hours earlier, the Bank’s quarterly Credit Conditions Survey confirmed what every small business owner will tell you – most high street banks still cannot, or will not, lend to SMEs.

As if to rub salt in the wound, the Bank’s official figures also showed that levels of consumer credit are booming. True, the imbalance between the banks’ attitude to personal and business lending – open season for one and “computer says no” for the other – is nothing new.

But what began as mere an annoyance to SMEs has morphed into a serious economic liability. The tension created as these two trends pull in opposite directions could soon reach breaking point.

With cheap mortgages and credit easily available for cars and retail purchases, Britain’s consumers have embarked on a spending spree. As a result Britain’s small businesses – who together form the backbone of the economy – are racing to expand to meet surging demand.

It would be a cruel irony indeed if runaway, credit-fuelled, consumer demand were to run into a brick wall of credit-starved businesses unable to raise supply.

Cometh the hour, cometh the crowdfunders

Fortunately, such a disaster may be averted – thanks to the huge array of alternative finance providers that have sprung up to fill the void left by the banks.

When the conventional credit pipeline became blocked, a whole new industry was born to connect the thousands of small businesses seeking finance with investors looking to make a decent return on their capital – either by lending to, or buying shares in, promising young businesses.

Yet when crowdfunding first emerged, Britain was in the teeth of the recession. Many business owners who had seen their overdraft facilities pulled overnight were attracted to alternative sources of finance primarily as a means to keep on top of cashflow.

Now the economy is back on song, businesses are more likely to want to access funds this way in order to invest for growth.

The cynics who predicted that the explosive growth in alternative finance was a fad, or a stop-gap while the mainstream banks got their house in order, have been proved spectacularly wrong.

Coming of age

Crowdfunding has now blossomed to take many different forms – equity, debt and asset-backed lending – and while it will never replace the banks, for countless businesses it has become a trusted part of the financial mix.

For investors it has proved nothing short of revolutionary – and the greatest democratisation of the investment landscape seen in a generation. Until now, small equity investors could only buy shares directly in listed companies, and could access start-ups only through a limited number of fee-laden funds.

Even when bank interest rates rise next year, they won’t come close to the returns being enjoyed by crowdfunding investors who prefer to lend their spare cash to SMEs rather than leave it to lose value in real terms in a savings account.

Immune to the economic weather?

In many ways Britain’s economic recovery has come despite, rather than thanks to, the banks. Now their willingness to hand out credit to consumers has fired a spending boom, yet their reluctance to lend to SMEs risks choking off the growth.

Such reckless schizophrenia is a serious threat to the economy, but mercifully Britain’s alternative finance providers may yet keep the wheels of our crucial SME sector turning.

Despite the complete change in economic climate, the twin forces behind the crowdfunding revolution – SMEs’ unfulfilled demand for credit and investors’ desire for strong returns – are unaffected.

The alternative finance genie is out of the bottle, and it now offers the best hope of solving a growing credit imbalance that threatens to trip up Britain’s economic progress just as it hits its stride.