Crowdfunding Will Grow To Benefit Consumers and SMEs

by Feb 2, 2016Investment Tips, Small Business Tips & Advice

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Crowdfunding and alternative finance are making the financial sector better for consumers, investors and SMEs.

The benefits of crowdfunding for the financial sector are manifold

At CODE Investing, we consider crowdfunding to be the first real financial innovation enabled by technology since the advent of the ATM. It improves capital raise experiences for the customers, investors, lenders and SMEs.

Don’t get me wrong. Banks and financial institutions spend billions on technology every year. However, for the most part, they have done so to increase their profit margin, sometimes at the cost of the customer. Crowdfunding is the first time technology has been harnessed to innovate finance for the benefit of the consumer.

Despite this accomplishment, online platforms still only account for 2 per cent (£3.2billion as per the Nesta Report) of the debt and equity markets (£171billion). I think that in the next 10 years every capital raise in the private market will have an alternative finance platform running the transaction. They will become part of the mainstream, raising global totals over £125billion annually, according to World Bank.

The alternative finance market addresses a gap for businesses and consumers, both of whom are being under-serviced by the incumbent solutions. Similarly, it serves investors who are looking to make higher yields than those offered through traditional institutions.

Given their very nature, these transactions carry an inevitable amount of risk. And as you would expect, the risk associated with each proposition is reflected in the yield. When it comes to crowdfunding, it is down to investors to make the right decisions, whilst being prepared for a loss.

In truth, there is hardly ever a perfect market where supply and demand sets the price. Information asymmetry exists, even in the public markets. Consumers expect the standards in the public markets to be higher, but often forget that professionals structure and price the risk before distribution.

It is impossible for a professional crowdfunding investor to form measured opinions about risk and price from the limited information and time available, especially when the information is not standardised. They usually base their decisions on some other signal. The danger comes when this signal is pure momentum.

Investors become subject to gaming tactics, as have been referred to in some articles recently. That is why at CODE, we employ a team of professionals who drive the structure and price of every deal on our platform. We provide investors with something other than momentum by aligning ourselves with them and investing in deals ourselves. We think we can improve this further by standardising on due diligence and structuring across the industry.

It’s important that investors are subject to rational education and guidance in place of scaremongering and scapegoating. Crowdfunding and alternative funding platforms will change how people relate to money, how they make choices and how they understand the financial market. They offer access, transparency and choice, alongside control and better costs for SMEs.

Like most great journeys, the crowdfunding movement will suffer its share of inevitable failures. However, with those failures come stories of success, ensuring that crowdfunding makes the financial sector a better place. 

This article was written for March 2016’s edition of Business Reporter. 

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Risk Warning

Investing in early stage businesses involves risks, including illiquidity, lack of dividends, loss of your investment and dilution and it should be done only as part of a diversified portfolio. CODE Investing Limited is targeted exclusively at investors who are sufficiently sophisticated, or who are judged by CODE Investing Limited otherwise to be appropriate, to understand these risks and make their own investment decisions. You will only be able to invest with CODE Investing Limited once you are registered as sufficiently sophisticated or otherwise appropriate for these types of investment. Investors via CODE investing are not protected from loss by the Financial Services Compensation Scheme against the Company’s default or for any losses they may suffer. Please read the full risk warning for more information. This page has been approved as a financial promotion by CODE Investing Limited, which is authorised and regulated by the Financial Conduct Authority. Investments can only be made on the basis of information provided in the pitches by the companies concerned. CODE Investing Limited takes no responsibility for this information or for any recommendation or opinions provided by the companies.

Tax Wrappers note: Innovative Finance ISA (IFSA), Self Invested Personal Pension (SIPP) and Small Self Administered Scheme (SSAS) : eligibility depends on an individual’s circumstances and is subject to change in the future.