Member Article

New finance firms offer viable lending alternatives

The Bank of England’s Trends in Lending report published in January showed that overall net lending to SMEs continued its decline in the 4th quarter of 2012 with demand for credit from SMEs decreasing and only a marginal improvement in the availability of credit from traditional lenders.

The responsibility of boosting lending to businesses is largely down to the 2012 government initiative, the Funding for Lending Scheme (FLS). Many considered the conditions of the Funding for Lending Scheme too broad, including large corporates, and the government has repeatedly failed to rectify it errors and implement the right incentives for banks to lend. The banks have received cheap and easy access to capital with only a token gesture to help the 95% of businesses classed as SMEs in the UK.

Digging deeper, the decline in the demand for lending from SMEs, is skewed towards business owners holding little hope of approval for a loan or overdraft, or simply put off by the increasing barriers of paperwork and bureaucracy that have been piled into the process over the past couple of years.

Under regulation, lending to SMEs carries a heavy capital cost to a bank. On top of this, the return on investment to assist SMEs is also very low and as a result, the service small businesses receive from their banks is equally as poor. Nobody wins from this status quo.

Thankfully, a plethora of New Finance firms are stepping forward to challenge the oligopoly of high street banks and provide a real and transparent alternative source of funding and financial services for SMEs.

Over the past year, peer-to-peer lending has gained considerable traction. Companies such as the Funding Circle, Squirrl and Funding Knight, which operate online funding marketplaces, have made low cost funds more easily available for businesses in need. Similarly, crowdfunding services, such as Kickstarter and Seedrs, where a crowd of people donate small amounts to get a project or business off the ground, have also taken off.

In other areas, New Finance firms such as Kantox and The Currency Cloud are delivering low-cost international payment solutions to businesses, removing the pain and hassle of cross-border money transfers and exposing the extortionate fees charged by banks.

These technology firms were born to better support our businesses and deliver a fairer and more accessible portfolio of financial services. The government is waking up to the value of these challenger services, pumping £110m to alternative finance schemes for lending to SMEs. This is the best indicator yet that these firms are now in the mainstream; they are credible, they are trustworthy and they are the right way to access to financial services.

In the coming years, we will witness the adoption of New Finance services as a driver of small business growth across Europe. The support for SMEs is available; businesses just need to embrace it.

This was posted in Bdaily's Members' News section by Nasir Zubairi .