According to recent figures released by the Bank of England lending by the major UK banks and building societies fell by £4 billion in the first quarter of 2012 – the biggest drop since March 2010.
Following this, research released in June 2012 by the Federation of Small Businesses revealed that 41 per cent of firms were turned down for bank loans during the second quarter of 2012. Without finance, good, healthy businesses can’t grow and without growth they can’t support economic recovery.
The problem of bank lending, or to be exact, the lack of bank lending, has troubled government for almost four years. Since the collapse of Lehman Brothers, credit lines to businesses have dried up. The government has looked at a plethora of initiatives but to date the National Loan Guarantee Scheme, Project Merlin and other ideas have failed to shock the industry back to health.
Additionally, the introduction of new banking measures, such as Basel III, has forced banks to rebalance their balance sheets. In order to comply with these measures, the banks have been reluctant to lend to small businesses creating a blockage that show no signs of loosening. However, the underlying problem with bank lending is larger than simply the introduction of new regulation.
The need for a shake-up in lending practices
If the economic meltdown has taught us anything, it is that the financial services industry is in dire need of innovation and a radical shake-up. This starts with greater competition. Currently, the top five high street banks account for 90 per cent of all small business lending. This is striking when you consider that in a little over ten years, the number of small businesses has almost doubled.
The Federation for Small Businesses now estimates that small businesses account for 99 per cent of all enterprise in the UK and 48.8 per cent of private sector turnover. As a result of an apparent absence of competition to the traditional banking behemoths, it would be tempting for small business owners to feel that bank finance is the only way to access finance. However, this is no longer the case.
Out of the ashes of the global recession have emerged a number of new and innovative businesses that remove the need for banks. These new types of businesses are leveraging the power of the web and delivering solutions that are better, faster and, in many cases, cheaper than what the traditional organisations can provide.
Enter the peer-to-peer lending platform
At Funding Circle, we are one of these new breeds of business. We operate a crowdfunding or peer-to-peer mechanism where people can directly lend to small businesses in the UK. The concept is straightforward: groups of people looking to invest their money are connected with borrowers looking for access to fast and convenient finance. From a business’s point of view each loan is comprised of small amounts of borrowing from many different people who compete to lend to it, enabling the business to borrow at a highly competitive rate.
To be accepted into the marketplace, a business must be a limited company, have at least two years’ worth of accounts posted with Companies House and a strong credit rating score. Loan values range from £5,000 – £250,000. The length of loans is either one, three or five years. Because people are lending money directly to businesses, there is no middleman or bank spreads, so businesses and investors get a better deal. On average, businesses borrowing money through Funding Circle pay 8.5 per cent interest rate.
Crucially the whole process is significantly quicker than using a bank and applications can be completed outside of the traditional 9-5 working window that exists with banks. In fact, on average 45 per cent of all initial loan applications are completed outside of bank working hours.
Funding Circle is not alone either – there are a multitude of new internet-based businesses offering new and innovative solutions to small business owners. These emerging industries are still embryonic and awareness is key, however their potential impact is huge. This has already been recognised by the government with the Chancellor announcing recently that £100 million has been allocated to non-traditional channels, such as peer-to-peer finance.
This is the first step to finding a solution to the lending impasse and enabling businesses to grow and support the wider economic recovery. There is no silver bullet to this problem. We have seen that banks alone will not fix the economy. However, new and innovative players are ready to step forward, help pick up the slack and ensure finance flows through directly to UK businesses. The future of finance is no longer about big versus small, but fast versus slow.