Alternative lending options for businesses: What are the options?
Why non-bank channels are filling the gap left by banks retreating from lending to small and medium businesses
Frustration with the high street banks is at an all-time high. The reliance on the banks to provide necessary funding is clearly not working. A recent report launched by the CBI urged small and medium-sized companies to consider a wider range of finance options to help them grow.
The report launched at a time when bank lending to businesses remains depressed. Recent figures from the Bank of England indicated that net lending by banks was down £300m in the first quarter of 2013. This is despite the introduction of new schemes like Funding for Lending designed to make credit cheaper to businesses.
What are the alternative lending options?
While the incumbents struggle to ease the flow of finance to their customers, a new industry of innovative, technology driven non-bank providers has emerged to challenge the status quo. Peer-to-peer lending in particular is growing rapidly.
The reason that new providers such as Funding Circle are proving popular with business owners is because they have stripped out the inefficiencies that are prevalent within the banking system.
At Funding Circle, businesses apply online. The application process takes 30 minutes and the initial answer about funding will be provided within 48 hours. Only businesses that have posted at least two years’ worth of accounts and pass the credit assessments (same as those in high street banks) can join the platform.
Small businesses can find competitive interest rates, while investors struggling to find good returns on their money will earn close to 6% on average.
Once a business has been credit assessed and approved through a swift and simple application process, their loan requirements are posted on the Funding Circle marketplace. Here, groups of people then choose which business they wish to lend to and the amount of money they want to bid. Auctions last approximately seven days, but a business’s loan can often be fully funded within hours, or even minutes of appearing on the marketplace. Loans are made up of small investments, sometimes from as a little as £20, by hundreds of different people. To date more than 2,500 British businesses have borrowed a total of £140m this way.
What’s next for alternative lending?
It is interesting that in an industry that is worth approximately £7.5bn per month, smaller, innovative providers are proving to be more effective at getting finance through to small businesses. Unsurprisingly, the non-bank sector has seen significant growth in a number of emerging sectors including early stage equity funding and invoice finance platforms, and the government is championing these new innovative providers.
In December last year the government announced plans to invest £110m the UK’s most prominent non-bank lenders, with a dedicated £25m investment specifically for the peer-to-peer lending industry.
Since the government started lending £20m through Funding Circle, more than 45% of the funds have been lent to more than 700 businesses across the UK. And, as they only fund 20% of every loan, this total figure is actually £36m when matched with other investment. It is fair to assume that other recipients will have experienced similar successes as well.
Whilst this may be barely scratching the surface of the total small business lending market, the growth of peer-to-peer lending is consistent. With commentators at the Bank of England and the research charity Nesta estimating that the sector could be worth approximately £12bn per year within a decade the signs are positive that non-bank sources will have a significant role in helping to solve the funding gap for small businesses.
Non-bank providers are not here to replace that banks but exist in harmony with them ensuring businesses across the UK can access fast finance when they need it most.