How to Fix Funding for Lending

By AltFi on Thursday 31 July 2014

Alternative Lending

Tomorrow will mark the second anniversary of the government’s Funding for Lending scheme (FLS).

The FLS was designed to help the banks make loans cheaply and easily to small businesses – but it’s fair to say that the scheme has up to now been coming up short. The Bank of England announced at the end of May that net lending to SMEs fell by £723 million in Q1 of 2014. But while the disconnect between credit starved small businesses and traditional sources of finance continues to deepen, lending via alternative finance providers is rocketing upwards.

The latest edition of the Liberum AltFi Index (published July 1st) indicated that the alternative finance space was then worth just shy of £1.7 billion. Over half of that figure is comprised of funding for businesses (the remainder made up by consumer facing platforms).

In other words, alternative and traditional finance providers are moving in opposite directions in terms of their lending to small businesses. Samir Desai – CEO and Co-Founder of Funding Circle – commented on the state of the FLS, and offered up his thoughts as to how the SME funding dearth might be addressed:

“It's clear that despite best intentions from the government, the Funding for Lending scheme hasn't worked. It was introduced into a market which is fundamentally broken. We know the demand from small businesses is there, but traditional lenders are encumbered by legacy IT issues and processes which mean they are not in a position to significantly increase supply – even with artificial assistance from FLS.” 

"The system needs a wider range of lenders to alleviate the pressure.  Marketplaces can provide this - they are quicker, more transparent and more efficient than banks at lending to small businesses. Peer-to-peer lending is a £1 billion industry in the UK, growing rapidly, with the potential to transform the financial system and jump-start small business lending.”

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