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Alternative financiers becoming the norm for British SMEs

Jun 10, 2013 Simon Williams

The Bank of England seems intent on making the Funding for Lending Scheme (FLS) work.

Business Secretary Vince Cable is convinced that the small and medium-sized enterprise's (SMEs) revival is the key to sparking the British economy as a whole. However, SMEs have been hurting for cash during the recession largely because banks and financial institutions have considered them too risky to lend to.

Fortunately, a recent study from Ernst & Young Item Club projected short term lending totals in the United Kingdom to rise between 2012 and 2013, from £440 billion to £477 billion, marking the first jump in about four years.

But more than likely, the increase will have little to do with the FLS program - or really banks for that matter.

"Our analysis suggests the main drivers of banks' return to lending will be better access to wholesale funding and a decrease in non-performing loans, rather than the Funding-for-Lending scheme making a material difference," according to Fox Business News.

Alternative lenders picking up the slack
Make no mistake about it, bank lending will never dissipate entirely. At the moment, this type of funding accounts for around 80 percent of all business loans, Reuters reported, and while that represents a decrease from past trends, it shows that bank lending won't be going away.

However, as Andy Baldwin, head of financial services for Europe, the Middle East, India and Africa at Ernst & Young, said, SMEs are expected to have the most access to finances in years, despite little change in the mindset of financial institutions.

"Banks have got plenty of cash, but they can't get it out of the door," Suma Chakrabarti, President of the European Bank for Reconstruction and Development, told Reuters last week.

That means other sources of finances have created this spark, such as the rise of alternative short term lenders. These types of financiers are not tied down to the same restrictions as banks, and instead have the ability to create their own rules for lending.

One of those regulations includes alternative scoring methods, such as Payment Reporting Builds Credit. Lenders that use PRBC look at different financial factors - including a company's ability to pay utility bills on time - to determine whether lending to an organization is a worthy investment.

Alternative lending has already paid enormous dividends in the United States' SME market, and the British government is actually hoping its own sector will achieve the same success. In fact, the BoE recently pumped £1.2 billion more into the FLS with this specific goal in mind.