Positive Signs for UK SMEs

By Ryan Weeks on Tuesday 2 February 2016

Alternative Lending

The British Business Bank (BBB) has published its second annual Small Business Finance Markets Report 2015/16, which depicts an improving SME finance environment in the UK. 

The headline findings include the registration of 350,000 new enterprises in the past year (October 2014 – October 2015), and the fact that the UK now has a record population of 5.4 million small businesses. Though access to finance remains an issue in certain areas, the report highlighted the tremendous growth of the business lending segment of the alternative finance space – which ballooned by 75% to £1.26 billion in 2015 (according to AltFi Data).

Equity finance in general is making a comeback, and the crowdfunding sector appears to be playing a major role. Though the ticket sizes are small in comparison with those in, say, the private equity fund space, crowdfunding has now become the most prolific funder of seed-stage businesses in terms of number of businesses funded. This may be in part due to the fact that awareness of alternative sources of finance (P2P lending, crowdfunding, etc.) is higher within the startup community than in the SME space.

The SME sector also exhibited a growing awareness of alternative funding products in 2015. 49% of the small business surveyed by the British Business Bank in 2015 had heard of crowdfunding, as opposed to just 13% in 2012. However, the BBB’s findings would suggest that broader market awareness is still lacking, with a large number of SMEs having heard of only one alternative finance provider. Although, for instance, 40% of survey respondents were aware of peer-to-peer lending, 19% were familiar with only one particular platform. Usage appears to be trailing a fair way behind awareness. Only 1% of the small businesses surveyed had accessed funding through a peer-to-peer lending platform. But according to the BBB, both awareness and usage “stand to benefit” from the Small and Medium Sized Business (Finance Platforms) Regulations 2015 – in other words, from the bank referral scheme. No word yet though on an arrival date.

The overriding message, in relation to alternative finance sector at least, is that the market is growing rapidly, and is beginning to make a mark on the UK economy. But a great deal of work still needs to be done, and the BBB – in keeping with its mission to promote diversity and competition within the small business lending market – will continue to support the industry.

The four largest banks continue to dominate the small business lending market. Peer-to-peer business lending in the UK accounted for £1.26bn of origination last year. Bank lending by contrast saw £53bn in gross flows. Keith Morgan, CEO of the BBB, addressed the imbalance:

“… we will continue to drive greater market diversity as we support new entrants with our Investment Programme committing £353m of support to new and alternative suppliers of finance.”

You can download the Small Business Finance Markets Report 2015/16 in full here.

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