Feature Alternative Lending

The changing state of UK alternative lending in 2022

Alternative lenders have shown the government how invaluable they are to SMEs, now they need to prove it to the regulator.

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This is an excerpt from AltFi’s Alternative Lending State of the Market Report 2022, which is available for free here.

Alternative lenders and their borrowers are weaning themselves off government-backed loan schemes, which is shaking up the sector. 

As economies and the business landscape returns to a relatively new normal, albeit with the threat of the Ukraine crisis and rising cost of living, many alternative lenders have found themselves at a crossroads. 

Changing Market 

The Coronavirus Business Interruption Loan Scheme (CBILS) and other emergency lending schemes such as Bounce Back Loans and the Recovery Loan Scheme (RLS) have dominated the lending market over the past two years. 

Trade body Innovate Finance estimates that fintech firms, including Peer-to-Peer (P2P) or marketplace platforms and non-bank lenders made up more than 20 per cent of all CBILS loans, considerably above their overall market share of loans for small and medium-sized enterprises (SMEs). 

Simon Cureton, chief executive of business finance aggregator Funding Options, warns this has restricted activity elsewhere and resulted in some casualties. 

However, British Business Bank (BBB) analysis in its latest Small Business Finance (SMF) report suggests these schemes became less utilised during the first quarter of 2021, coinciding with CBILS applications closing in March. This could open the floodgates to demand for non-government-backed products.

“As we begin to wean our economy’s reliance on government-backed schemes with the Recovery Loan Scheme deadline approaching in June, we are already seeing the anticipated resurgence in the SME lending market,” Cureton added. 

“In January, Funding Options saw a 58 per cent year-on-year increase in SMEs seeking finance from our lender panel, demonstrating the importance of a buoyant alternative lending market.” 

Further Retail Reductions 

Retail-backed P2P lending once dominated the alternative lending market but institutional funding has become more prevalent. Some of this was happening pre-pandemic amid the introduction of new P2P regulations including marketing restrictions and appropriateness tests.

The proportion of institutional funding versus retail funding through P2P business lenders increased from 72 per cent in 2019 to 89 per cent in 2020, according to the Cambridge Centre for Alternative Finance. 

But another cause of this shift was that only institutional funding could be used by platforms such as Funding Circle to take part in CBILS and RLS. This caused it to close to retail investors in 2020, a move made permanent in April 2022. 

The world’s oldest P2P lender Zopa also announced its exit from the market earlier this year to focus on its banking brand and RateSetter already left in 2021 after it was acquired by Metro Bank.

These were major players each with billion-pound loan books backed by retail investors. 

The BBB warned in its SMF report that it is unclear where alternative lending levels will return to without the government guarantees.

It said Covid scheme participation and tougher Financial Conduct Authority (FCA) marketing restrictions had led some marketplace lenders to adopt a range of different approaches and structures reliant on institutional rather than retail funding. “How much this will persist is still unclear,” the BBB added. 

The only P2P lender with a loan book above £1bn now is Assetz Capital, while research by Innovate Finance’s 36H Group shows the next largest books are worth around £200m…

Want to keep going? Read the full feature in AltFi’s Alternative Lending State of the Market Report 2022, out now!

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