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Online resources driving British SMEs away from banks

Jun 10, 2013 Simon Williams

If British banks thought they had small and medium-sized enterprises (SMEs) in their back pocket, they appear to have overplayed their hand. Spurred by the internet, SMEs are continually turning to alternative sources of funding.

"It's no secret that small businesses have struggled for access to finance from banks and now peer-to-peer lending platforms are stepping into the breach," said Stian Westlake, executive director of policy and research at Nesta. "Coupled with the recession, it's the explosion of social media and the use of the Internet that has made it easier and cheaper to connect those who want to invest with the businesses that need finance."

For a while after the recession hit, banks immediately stopped lending to parties that were viewed as being risky investments, and a large percentage of SMEs fit that bill. As a result, smaller companies were forced to go alternative routes.

Recently, the Bank of England announced it was extending its Funding for Lending Scheme, an initiative that, among other objectives, is aiming to enhance short term lending to SMEs. But if a recent Nesta study is any indication, smaller companies are the ones turning away from banks.

The report revealed that alternative short term lending methods have taken off, including:

  • Peer-to-peer loans, which could produce approximately £12 billion in lending every year.
  • Crowd funding, projected to deliver £1.7 billion annually, increased 81 percent year-over-year.
  • Social media and other online resources are becoming prevalent when it comes to short term lending in the United Kingdom.

One of the biggest attractions of these types of loans is how quickly they are available, according to Reuters. For the sake of survival, many SMEs are in desperate need of funding at the moment, and they can't wait around for weeks or months simply to hear back from banks as to whether they're even eligible.

Another advantage of alternative credit is the fact that many of these lenders use Payment Reporting Builds Credit scoring methods, which looks at alternative financial factors such as a company's ability to pay its utility bills.