The shocking vote to leave the EU in June’s referendum initially sent markets into a panic, triggering uncertainty over the stability of the economy.
With the threat of recession hanging over the country along with the Bank of England’s halved base rate of 0.25%, the alternative finance sector is set to face some serious challenges in the months and years ahead.
The European Commission’s Capital Markets Union (CMU) plan to streamline the movement of capital between European countries is just one of the policies likely to waver in the wake of the vote.
While a more integrated market is expected to lower the cost of funding and strengthen the financial system, the process of the UK leaving the EU will cause additional challenges for both traditional and alternative finance sectors.
What challenges is the industry facing?
While the UK government formulates its exit approach and the country strives to maintain its global role as a financial centre and hub of Fintech innovation, the remaining EU members are discussing as to what the relationship will be with a UK outside the EU and some policy-makers will be seeking to punish the UK for its departure.
Ultimately, the main risk for the alternative finance sector as a result of Brexit is that SMEs will stop borrowing money out of fear, while banks may hold back from lending altogether.
While the industry may lose some momentum, it’s hopeful that short term opportunists will be separated from the genuine long term players. If business becomes scarce, the scrutiny of credit insurers will be crucial in preventing reputable lenders from lowering standards and increasing the number of loan defaults.
Promisingly, a new report by Deloitte seems to be of the opinion that alternative lending will continue to grow, hailing the market as a “quiet revolution” in how companies secure funding thanks to their speed, flexibility and ability to support complex deal structures.
What is the long-term outlook for alternative lending?
With a focus on long-term relationships and lower levels of leverage, alternative lenders are likely to be seen by investors as a way of generating more stable returns within a low interest rate environment.
So, if the banks do become more risk averse, alternative lenders will have a fantastic opportunity to target the companies struggling to secure traditional funding to grow the non-bank lending market even further.
While alternative lenders have the potential to flourish in the face of economic turbulence, small to mid-sized business finance lenders run costly and considered credit analyses on borrowers and should not be seen as a “last resort”.
There also needs to be synergy between private lenders and traditional banks, with 67% of alternative lenders using banks to source credit opportunities.
However, and perhaps most importantly when considering the alternative finance market’s post-Brexit fate, the report found that 91.7% of the investors surveyed anticipate holding greater exposure to private credit in the future, indicating the sector is here to stay.