BEFORE the global financial crisis, banks were the lender of choice for Britain’s small businesses, and perhaps the only option they would consider.
Since then, banks have become more risk averse and are pulling back from lending in some parts of the market, especially since the EU referendum. Peer-to-peer, or rather peer-to-business (P2B), lending has stepped in to fill the gap.
The Peer-to-Peer Finance Association (P2PFA) says the industry provided £660m of new lending to businesses in the first quarter of 2018 and, since the third quarter of 2017, there has been a 35 per cent increase in net lending.
Robert Pettigrew, director of the P2PFA, said this trend “contrasts with data published by the Bank of England for banks, and highlights the important role played by the P2P lending sector in ensuring businesses have access to the finance needed to fuel our economy”.
SMEs are using P2B finance to grow, hire more staff, improve their website, buy new equipment or vehicles, refurbish their office, pay one-off bills or boost working capital. SMEs are also using platforms as a way to fund property purchases in the face of tighter mortgage lending conditions.
Meanwhile, property-focused P2P lenders like CrowdProperty and The House Crowd are offering finance specifically for SMEs in the property space, such as developers.
But some SMEs remain hesitant to tap P2B as a source of funding, despite greater awareness of what is on offer.
Recent research from Tindall Perry found that almost three quarters of finance directors had reasonable knowledge of P2P finance, but less than half would feel comfortable using it, with the majority (83 per cent) saying traditional bank lending remained their first choice.
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Funding Circle, ThinCats and Assetz Capital are among those P2P platforms specialising in loans to SMEs. Funding Circle is the UK’s largest P2B platform, lending £1.3bn to small businesses last year. Its average loan is £65,000 at a rate of 10 per cent over 36 months.
Funding Circle says that, although some of its rates may look relatively high, its customers report that they can borrow from the platform more cheaply than they could from their bank, which might refuse them altogether.
Natasha Jones, head of corporate communications at the platform, said: “Banks are advertising at rates much lower than that, but on secured loans. About 20 per cent of the SMEs that borrow through us say they would not have been able to borrow through banks. For example, a marketing firm might be profitable, but it doesn’t have the assets a bank would look for.”
As well as being willing to look at borrowers the banks overlook, another advantage P2B platforms have is their technology, with online applications speeding up the process.
“As long as the business looks like it is in good health, we can lend for different purposes. We look at the same things a bank would look at, but our advantage is the speed of decisions due to our technology,” Jones said.
However, she noted that some SMEs remain sceptical about P2B given it is a fairly new form of business financing. “Before the crisis, banks were the only place SMEs could go for financing, it was what they were used to,” she added. “We have a challenge to overcome the ‘bank first’ mentality.”
Funding Circle has forged referral partnerships with banks to address this. So, where a bank doesn’t want to lend to an SME, the idea is that they will refer them on to P2P platforms in the hope of keeping that business as a banking customer in future.
This is a compromise that could have the dual effect of bringing P2P and P2B lending into the mainstream, while allowing traditional banks to demonstrate the sort of flexibility and innovation that customers increasingly want.
In a way, by plugging the funding gap for small businesses, the P2P sector has also laid the groundwork for a new form of banking that can benefit everyone.
Duke of Uke is a specialist ukulele store in London which also sells online. The business needed finance to increase stock levels to meet growing demand, to update its website to boost its ecommerce opportunities, and to start manufacturing its own brand of ukuleles.
Matthew Reynolds, managing director, said he approached his bank first, despite some misgivings. “My past experience with banks has been quite negative, I always felt like a bit of a beggar going to a bank for a business loan, it’s like you’ve committed a crime.”
He also found the bank’s slow decision times were problematic. “You may need finance at certain junctures, for example, to increase stock levels at Christmas,” he explained. “If banks take several weeks to give you a no, you are scuppered.”
In the end he took out two loans with Funding Circle, the most expensive one with an 18 per cent APR over 36 months, and also used a PayPal loan to top up borrowing to the amount he needed. He said although the APR is higher than a bank loan, it was worth it for ease of access, and a swifter and less laborious process, and he would consider P2B again in future.
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