The funding crowd

Balázs Gyimesi, OECD Observer

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“Every crowd has a silver lining,” said P.T. Barnum, America’s “greatest showman”. For businesses, Barnum’s play on words is especially true: crowds are becoming something of a motherlode of funding for small and medium-sized enterprises (SMEs). With bank lending declining, smaller businesses are looking for alternative ways of financing. Thanks to the world wide web, they can now solicit funds not just from banks and professional investors, but from virtually anyone with internet access. This approach can take different forms. Besides crowdfunding (where many individual contributions–usually sourced online–make up the funding), examples include online invoice financing (where SMEs, for instance, can borrow online against unpaid invoices) and peer-to-peer lending activities (online services that match lenders with SME borrowers). Together, these funding opportunities constitute the online alternative finance market.

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The volume of alternative financial instruments has generally increased in recent years. Looking at changes between 2013 and 2016, however, it is clear that the development and size of the alternative finance market varies greatly between countries. China is by far the largest market for online alternative financial instruments, expanding exponentially from US$5.6 billion in 2013 to US$243.28 billion in 2016. In comparison, the total market volume of the online alternative finance industry in the US amounted to only US$34.5 billion in 2016, despite a steep rise from US$4.4 billion in 2013. The European alternative finance market, on the other hand, has stayed well below the volume of the US and the Chinese markets, having raised US$2.1 billion in 2016 and only US$0.3 billion in 2013. The UK alternative finance industry has volumes well above that of the other EU28 countries combined, having raised over US$5.6 billion in 2016.

With rising volumes, alternative instruments increasingly complement traditional sources of financing, and this has called attention to the need for a regulatory framework for crowdfunding. In crafting regulation, however, governments should keep in mind how crucial online alternative finance is to businesses. With bank lending on the decrease, every small business needs its silver lining.

OECD (2018), Financing SMEs and Entrepreneurs 2018: An OECD Scoreboard, OECD Publishing, Paris. http://dx.doi.org/10.1787/fin_sme_ent-2018-en

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