Yesterday’s “Trends in Lending” report from the Bank of England has confirmed that monthly lending to UK businesses is still on the decline.
In spite of this general dip in net lending, the Bank of England made reference to peer-to-peer lending and crowdfunding as substantial, alternative sources of finance for businesses. According to the Credit Conditions Survey, credit availability fell for small businesses in the third quarter. On top of this the Federation of Small Businesses’ Voice of Small Business Index 2014 Q3 reported that 52% of small firms in the survey found that the availability of credit was ‘poor’ or ‘very poor’. This figure has fallen from 75% two years ago – thanks in part no doubt to the extreme growth of the alternative finance space.
“Net lending to small businesses is still falling, which is disappointing given their immense importance to the economy. Traditional banks are hamstrung by legacy issues, limiting their capacity to lend. Rather than a single line of credit from banks, the financial system needs to offer small businesses access to a wider variety of investors. The unprecedented level of demand we are seeing from creditworthy firms at Funding Circle suggests it's not demand for finance that is falling, but instead demand for a traditional bank loan."
“The fall in bank lending to businesses reflects a long term trend of small businesses and traditional lenders growing apart - businesses don’t want the products, and banks aren’t keen on offering them.
“For growing businesses looking for new credit lines it is harder now to find a willing lender amongst the banks than it has been since the onset of the financial crisis in 2007. Most new credit applications are rejected by banks*.
* Source: BDRC SME Finance Monitor
Ratesetter also jumped into the discussion:
“For the first time [the Bank of England] acknowledges the important role played by alternative finance in providing new lending sources for the SME community, yet it significantly underplays the impact of peer-to-peer (P2P) lending on the future of SME finance.”
“The report recognised that in the first half of 2014, P2P business lending reached £0.3bn. However, it suggested that these figures were small compared to funding from traditional institutions. What the Bank of England failed to recognise was that latest figures from the Liberum AltFi Volume Index show that P2P lenders have provided over £520m non-bank finance to businesses in the year-to-date. These figures represent an exponential growth rate of 248% in the year to date.”
“A cursory glance of the report would lead you to believe that the lending landscape has only marginally improved for UK SMEs. However, wider data confirms that businesses hungry for finance are finding the support they need from the alternative finance community.
There is clearly a demand for credit coming from small businesses that is not being adequately satisfied by the banks. It will be interesting to see whether the banks decide to work with the alternative finance industry in an effort to revitalize their SME-facing services. RBS, for one, appears poised to venture down that path. The big question now relates to how these banks choose to position themselves against the incumbent alternative finance providers.