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Rise of alternative lenders might be contributing to declines in British bank loans

Apr 05, 2013 Simon Williams

Small and medium-sized enterprise (SME) owners in the United Kingdom might be slowly regaining their confidence, but British banks have had very little to do with that.

A recent Bank of England study revealed that since the launch of the Funding for Lending Scheme (FLS), larger firms are having an easier time securing funding from banks, The Wall Street Journal reported. But short term lending to smaller businesses - the original intent of the project - hasn't shown any noticeable improvement.

"Although the overall supply of credit to businesses increased for the second successive quarter, it is concerning that the rise was confined to big business, while SMEs continue to be left out in the cold by lenders," Adam Marshall, director of policy at the British Chambers of Commerce, said in a statement regarding the Bank of England's recent survey findings.

SMEs turning attention elsewhere
Marshall said that the results of the study, in conjunction with statistics relating to the FLS initiative, "confirm the weak credit environment that many small- and medium-sized companies continue to face." Not only has the Funding for Lending Scheme failed to deliver increased lending to SMEs, but it appears small business owners have largely stopped looking toward banks for help at all.

"The fear is that the weak demand for finance [among small and medium-size enterprises] reflects weak demand for the SMEs' products," said Brian Hilliard, economist at Societe Generale. "If that is the case then company lending initiatives will prove futile."

However, there could also be another reason SME owners have abandoned bank loans: the rise of alternative short term lenders. A recent blog post by The Guardian pointed to methods like crowdfunding and peer-to-peer lending, which appear to be gaining traction in the United Kingdom.

The reason alternative lenders are so popular is that they use different scoring measures - such as Payment Reporting Builds Credit (PRBC) - to determine whether or not to lend to a business. PRBC analyzes factors like whether the company has paid its utility bills on time, rather than simply looking at credit scores. As a result, a large percentage of subprime and near subprime candidates have been able to secure funding.

Other advantages of methods like crowdfunding and peer-to-peer lending are their timeliness and flexibility. SMEs now have the option to receive loans of varying sizes for a range of uses, and those resources are available far more quickly than traditional bank funding.