Alternative lending will be key for British economy's revival

The United Kingdom's small and medium-sized enterprise (SME) sector has suffered from a dilemma familiar to most Western countries during the recession: an extreme lack of available funding.

Bank lending to SMEs has all but dried up, despite substantial government initiatives to improve the matter. As a result, Bank of England Governor Mervyn King proposed that business owners turn to new banks for lending.

"Over the last two or three weeks we have definitely seen an increase in the number of inquiries. There are a lot of disillusioned and frustrated businesses at the moment," Sue Toolson, manager of the Handelsbanken branch in Ilkley, Yorkshire, recently told The Telegraph.

But these new banks, at best, only represent a short-term solution for SMEs. While it's proven effective thus far, these firms are not as well-equipped as bigger banks to manage massive influxes in lending, which means eventually they won't be able to handle all the requests.

Alternative short term lenders, on the other hand, provide SMEs with a more permanent option. In a recent column for The Telegraph, PricewaterhouseCoopers chairman and senior partner Ian Powell stressed that alternative funding should be one of the British government's three main focuses over the next decade.

Currently, the U.K. lags behind other nations like China, Japan and the United States in this area. He suggested that through increased collaboration between the public and private sectors, alternative lending could become more relevant.

Not only do these methods appear to be more sustainable, but alternative lenders use different scoring methods that open up funding for a larger number of SMEs. One of those measures includes the Payment Reporting Builds Credit score, which looks at factors like utility payments to determine if a company is safe to lend to.

The alternative lending market is already well-developed in the U.S., and so far, it's been enormously successful.