PEER-TO-PEER lenders could be a better match for some small businesses than traditional banks, according to the Federation of Small Businesses (FSB).
A report from the trade body for small- and medium-sized enterprises (SMEs) warns that firms are unaware of different growth finance options and over-reliant on loans from big four banks rather than alternative providers.
It says that only 13 per cent of small firms are currently applying for external finance, with more than two thirds being offered lending rates above four per cent.
However, it also notes that the share of small businesses applying for P2P credit rose from four per cent to nine per cent between late 2015 and early 2016.
“Despite being a decade on from the crash we still have this dangerous combination of weak appetite for, and low awareness of, alternative finance options, high borrowing costs and inadequate support for small firms that are turned down by banks,” said FSB national chairman Mike Cherry.
“Too many small business owners approach the big lender they’ve always dealt with as a first port of call when asset, P2P or equity finance could be a much better match for them.”
Open Banking and the reform of the Bank Referral Scheme are key to generating real competition for small firms, according to the FSB.
However, it warns that a chaotic no-deal Brexit would further restrict small business access to finance.
Its report highlights the role played by the European Investment Bank (EIB) in improving small business access to new funding across the UK.
The EIB put more than £3bn behind small business finance markets between 2006 and 2016 and backs the £400mn Northern Powerhouse Investment Fund (NPIF) and £250mn Midlands Engine Investment Fund (MEIF).
“After Brexit, we need to see EU funding streams matched and replaced immediately – the government should be looking at further expanding the role of the British Business Bank,” said Cherry.
“It was encouraging to see the chancellor outline Brexit contingency plans for the BBB at last month’s Budget. They have to be a last resort though. The goal should still be to secure a transition period as part of an ambitious Brexit deal that works for all small firms.”
Read more: High Street banks are failing SMEs, says FSB