New UK plan to lean on alternative lenders

In the past, small and medium-sized enterprises (SMEs) relied exclusively on banks and other financial institutions to secure loans. While that worked for awhile, they paid dearly when the recession hit in 2008.

"Inadequate access to finance for small and medium-sized enterprises is one of the biggest risks to economic recovery," said Vince Cable, the U.K.'s business secretary, according to The Telegraph.

After the Funding for Lending Scheme, which aimed to boost bank lending, was deemed largely a failure, the government recently launched another initiative: the Business Bank. The project will give out £1 billion total, which in term will go to short term lending to SMEs nationwide.

John Walker, chairman of the Federation of Small Businesses, had positive things to say overall about the new plan.

"For too long, the SME lending market has been dominated by a few big players and businesses are struggling to access finance to grow," Walker told The Telegraph. "Competition should come from more banks on the high street as well as alternative providers."

Paving the way for success

More than likely, alternative short term lenders will never replace banks and financial institutions' role in the SME sector entirely - and that's not necessarily a bad thing.

In the United States, SMEs are slowly bouncing back from the country's own recession, thanks largely to the help of alternative financers. In fact, Lincoln International managing director Rob Kahn recently said the current lending climate is the best it's been in decades, according to peHUB.

Alternative lenders often use Payment Reporting Builds Credit Scoring Methods, opening up funding to many previously subprime candidates. In addition, these methods make loans available faster and for varying amounts. As these strategies have gained popularity, banks have been forced to adjust by loosening up their air-tight restrictions.

This has led to what Kahn considers a better lending climate than even 2007, prior to when the recession hit. The reason, he said, is that having "two distrinct lender bases and structures to use" offers SMEs options they've never had before.

The U.K. looks to be following in the United States' footsteps - and they're wise to do so. While banks and financial institutions are still ideal sources for larger loans, alternative lenders offer an excellent complement for other needs. For SMEs that require finances in a pinch, these methods could be the difference between going under and thriving.