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With bank lending showing no improvements, alternative measures becoming go-to for SMEs

May 07, 2013 Simon Williams

The United Kingdom has experienced an extremely slow recovery from the recession, at least partly because small and medium-sized enterprises (SMEs) are struggling mightily.

While there are a number of contributing factors, banks' reluctance to lend to SMEs certainly ranks near the top of the list. A recent study from the National Institute of Economic and Social Research (NIESR) revealed that banks rejected loan requests in 2011 and 2012 at significantly higher rates than they did prior to the recession, marking yet another indictment of the already disappointing Funding for Lending Scheme.

To make matters worse, "fees are increasing all the time," Oakfield Capital partner Roy Merritt recently told The Telegraph. "We've even seen fees for banks simply considering to lend."

The NIESR report stated that this lack of available short term lending will continue to pose roadblocks to the British economy's recovery, both in the near and long term. The study also found that for SMEs with average-to-low credit scores, it's nearly impossible to secure funding from financial institutions.

Alternative lenders starting to emerge
Many SME owners weren't willing to wait for the economy to turn around - and some decision-makers simply can't wait if they want to survive. As a result, alternative sources of finance have rapidly emerged as a viable option for these companies.

"Investors have traditionally been invested in liquid credit and illiquid private equity," Anthony Fobel, partner and head of direct lending at BlueBay Asset Management, recently told Euromoney. "The growth in non-bank direct lending now offers them the opportunity to invest in something else - illiquid credit."

Currently, banks account for approximately 85 percent of all business loans in the U.K., according to The Guardian. However, alternative short term lenders are coming on fast, to the point where the Bank of England is actually encouraging SMEs to look toward these methods more often. In a more recent initiative, called the Business Bank project, Business Secretary Vince Cable declared that the BoE would be supporting alternative finances going forward.

But even before the Business Bank initiative, SMEs had already started gravitating toward these forms of funding, according to Euromoney. Overall, bank loan application approval rates plummeted about 25 percent from 2007 to 2010, a problem that's affected smaller companies the most. Conversely, alternative lenders have increasingly made funding available to SMEs during that same time period.

PRBC among many possibilities
The advantages of alternative lending are wide ranging, beginning with its flexibility. SMEs need funding for a variety of reasons, whether it be to launch a new product or simply pay off bills. Unlike banks, alternative lenders tend to provide funding for a wide range of amounts, and the speed with which companies can receive these loans is another major advantage.

But perhaps the greatest strength of alternative financiers is that they typically use different scoring methods to determine whether or not to lend to a firm, such as Payment Reporting Builds Credit, which takes into account factors other than credit scores. For many SMEs that are at or near the subprime credit level, this is the difference between being eligible for fundingand losing out.