The 2008/09 Global Financial Crisis caused enormous funding difficulties for all business but especially SMEs

Small businesses are core to economic competitiveness

Dynamic market of online lenders that are using technology to disrupt the small business lending market

Small firms are always hit harder during financial crises because they are more dependent on bank capital to fund their growth

The industry started out slowly (as many do) but advancements in technology and institutional interest have fueled vertical growth

Legacy costs, varying and convoluted regulatory environments and a culture that is too tied to the past, have hurt the old banks.

ease of use by small businesses and the quick turnaround on loan decisions. Innovative applications of technology; edge when it comes to customer service

Banks can compete simply because their portfolios already include their existing small business customers, and they have large amounts of data about those customers. Additionally, banks don’t have to raise high-cost capital to compete because of their ability to make loans against their depository assets.

Banks have found that increased regulatory oversight has affected the availability of small business credit.

There is already disagreement over the appropriate level of regulation

emerged under significant institutional constraints, it has since reshaped itself to cross heterogeneous institutional settings.

Crowdfunding uses collective decision making via a social media platform to evaluate and raise financing for new projects or new commercial ventures. Crowdfunding emerged simultaneously in a number of developed economies

After the financial crisis, debt and equity crowdfunding expanded rapidly

Historically low interest rates on savings motivated individuals to participate as lenders in the peer-to-peer debt crowdfunding market, which is now the most widely adopted form of alternative finance.

Equity crowdfunding has grown more slowly than crowdfunded debt financing

In crowdfunding and peer-to-peer lending, individuals supply the financial capital. In this market, Internet-based platforms serve as intermediaries or network orchestrators linking entrepreneurs with potential funders

For example, more than 100 private equity funds, with more $6.5 billion under management, target microfinance as a social investment strategy (Reille & Glisovic-Mezieres, 2009). Such funds raise capital from banks, foundations, or government agencies, and funnel the money to microfinancing organizations, international agencies, or charities that in turn make loans to entrepreneurs at the base of the pyramid in developing economies (Bruton, 2010; Khavul & Bruton, 2013).

microfinance organisations often fund entrepreneurs who start their business out of necessity because they lack access to paid employment. If a good job with steady income becomes available, then many entrepreneurs willingly shut their businesses and move on.

The landscape of new alternative forms of finance is heterogeneous, and it may also be the case that there is considerable variation in the behaviour of entrepreneurs seeking different forms of this finance.

Investors stand to lose all their money when companies fail, since crowdfunded investments are not part of the Financial Services Compensation Scheme

one in five companies that raised money on equity crowdfunding platforms between 2011 and 2013 had gone bankrupt

The Financial Conduct Authority, which regulates the sector, says it regards equity crowdfunding “in particular to be a high-risk investment”, and that investors should be aware that “it is very likely that [they] will lose all [their] money”. Moreover, the investments tend to be highly illiquid as secondary markets are not established.

“The real problem with equity crowdfunding is how investors can understand if they are getting a good deal,” he said. “Also, how are they are going to be treated as shareholders? And when will there be an exit, and will they then get good value for their investments?”