Alternative lending: The real 'silver bullet' for SMEs

When the Bank of England first launched the Funding for Lending Scheme, officials were declaring that it would help get the small and medium-sized enterprise (SME) sector back on track.

My, how things have changed in a hurry.

The BoE recently tweaked the FLS initiative and extended it into January 2015. This time, however, no one is predicting whether SME's funding issues will be resolved.

"We cannot say that this will conclusively deal with the question of whether the problem is a lack of loan supply or demand, but we can say that we have used our toolkit to create a big incentive for banks to lend to small firms," said Andrew Bailey, deputy governor for prudential regulation at the Bank of England, according to The Telegraph.

Duncan Kreeger, director at West One, was more definitive in the dismissal of the FLS program, claiming that "the odds don't look great." His company recently conducted a survey that found just 16 percent quarterly growth in short term lending for the commercial sector during the first three months of 2013, reported Mortgage Introducer.

Lending reaches new heights
The West One study didn't have exclusively bad news - far from it. The report revealed that short term lending to businesses totaled £360 million in 2012, marking an all-time high.

It's well-documented that banks have tightened their lending restrictions significantly since the start of the recession, and even the FLS incentives haven't motivated them to loosen up their standards. That means another source must be responsible for this increase in funding.

"Alternative lenders are galloping twice as fast in the other direction now providing a million pounds in business loans every day," Kreeger said. "A growing number of UK firms are turning away from the inflexible packages on offer from traditional lenders."

Lack of knowledge proves costly
The rise of alternative financiers has come in spite of the limited knowledge that many consumers and businesses have about these processes. More than 80 percent of respondents to the West One survey believe poor understanding is causing prospective clients to miss out.

So what exactly makes alternative lenders preferable to traditional financiers? Kreeger noted the improved flexibility and personalization of these types of methods. Alternative lenders typically provide a wider range of loan amounts, which they often push through quicker than banks. This is especially important for a U.K. SME sector that is strapped for cash right now.

Another benefit of alternative short term lenders is that many employ Payment Reporting Builds Credit scoring methods, which look at different financial factors aside from just traditional credit to determine whether or not to lend to a company.