How alternative lenders could drive SME growth in UK

When the global recession hit in 2008, small and medium-sized enterprises (SMEs) were among the first to suffer. Banks determined that lending to SMEs represented too big a risk without the potential for receiving huge returns.

As with most Western countries, having thriving smaller companies is a key component of success for the British economy. Recognizing the SME sector's importance, the Bank of England launched its Funding for Lending Scheme (FLS) last June with the hope that it would motivate financial institutions to lend more.

That hope has been largely squashed, according to an article by The Guardian.

"The evidence to date does not point to a large block of pent-up demand that the scheme is helping to service, and this does not bode well either for the FLS or for the economic outlook more generally," said Barclays economist Simon Hayes, according to the news source.

Government initiatives failing
Despite pumping billions into the FLS initiative, the United Kingdom's economy has remained just as stagnant as before. The national GDP is still 4 percent lower than it was prior to the recession, though the sector is especially hurting.

At a recent summit, European Union leaders announced that they were making jobs and short term lending, among other subjects, their top priority for 2013, the International Business Times reported. The EU is considering a new law that would potentially spur banks to lend more, including across national borders.

But as the Funding for Lending Scheme has indicated, government initiatives, no matter how well-intentioned, can't really force financial firms to do anything. For the most part, since the recession, banks will only lend to companies if there is a good chance that the decision achieve a return on investment.

With SMEs still in desperate need of funds, what options do they have left?

Following in the United States' footsteps?
Small companies in the U.K. would be wise to follow the lead of U.S.-based SMEs, which have increasingly turned toward alternative short term lenders for help in recent years.

"Small business lending is a profitable business. I'm surprised it has taken so long for some players to get back into the game," said Biz2Credit CEO Rohit Arora.

The U.K. alternative lending sector is about a couple years behind the United States'. In the U.S., both large and small banks saw their SME loan approval rates plummet since the onset of the recession. In fact, according to a Biz2Credit study, big banks pushed through just 10 percent of loans in May 2012, while small banks spent 2012 accepting less than half of all applications.

As a result, SMEs and startups leaned on alternative lenders, which approved nearly two-thirds of small business loan requests throughout 2012 and 63.7 percent in February 2013.

Alternative lenders tend to use Payment Reporting Builds Credit scoring methods. This has opened up lending to substantially more companies. In addition, alternative lenders are more flexible than financial institutions, handing out a wider range of amounts, and those loans can typically be received in a more timely manner.

As bank lending continues to lag in the U.K. - particularly after several failed government initiatives - SMEs may want to turn their attention toward alternative methods.