P2P Lending Taking Business From Banks

There’s a question on the lips of many of many entrepreneurs today looking for loans to grow their businesses – ‘Do I still need a bank?’

No, is the short answer. Bank lending experienced a huge shortfall during and following the financial crisis, and that in the end turned out to be the key driver for growth and innovation in the alternative finance sector.

And it has indeed grown at a tremendous pace. Last year the sector lent £1.74 billion – double the amount of 2012 – and is reported to be on course to lend £4.4 billion in 2015 across the 108 alternative finance platforms now available.

Since the recession, the banks have found the capabilities once again to start lending to larger companies – but SMEs are still finding it hard to access the finance they need from banks.

Net lending to SMEs under the Funding for Lending Scheme in 2014 fell by £3.9 billion. Put simply, the safe door at the bank remains firmly shut for many SMEs – especially new and young businesses – with the estimated rejection rate at roughly 50%.

The reason is simply that many of these companies are not meeting the risk profiles of the largest banks, even though a significant proportion of those who are rejected would actually be viable.

And it seems to be going from bad to worse for the SME in this regard. Only last month draft legislation was put forward by the Basel Committee on Banking Supervision, which rules that banks will need to treble the amount of security needed for an SME to borrow money. This is simply not cost effective.

Small businesses, it seems, are taking yet another hit, but there is a safety net. There is a new referral initiative from the government, which orders banks to direct rejected customers towards alternative finance providers

What SMEs can’t get from the banks, they can obtain elsewhere through P2P lending and other alternative lending platforms. The government is currently selecting partners to help deliver the scheme, which, if implemented, could see another £2 billion being injected into the small business sector.

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