Banks shunned as SMEs and investors turn to peer-to-peer finance
Britain's army of small businesses are turning to peer-to-peer lending platforms to raise capital, and the majority say that they wont go back to banks for future finance.
- Nesta publishes UK's first independent research into 'peer-to-peer lending' as a challenger to mainstream small business finance
- Research predicts that P2P has potential to deliver as much as £12bn in business lending annually
- Three quarters of lenders expect to increase P2P business lending this year
Britain's army of small businesses are turning to peer-to-peer (P2P) lending platforms to raise capital, and the majority say that they won't go back to banks for future finance. These are the findings from Banking on Each Other, the UK's first analysis of P2P lending to businesses from Nesta, the UK's innovation foundation.
Banking on Each Other is published following the release of Bank of England's latest Trends in Lending figures last week (19 April), which showed net lending by the high street banks to have declined by £5 billion - 25 per cent more than the previous quarter.
The report revealed that indications are good for peer-to-peer lending saying it could emerge as a challenger to the existing model of bank lending. Currently P2P business lending is a small market - accounting for £120m annually. But, based on the trends and motivations of lenders in the research, Nesta predicts that P2P has potential to deliver as much as £12.3bn in business lending annually.
Nesta examined the characteristics and motivations of both P2P lenders and business borrowers, using Funding Circle's, the UK's largest P2P business lending site, proprietary data and a survey of 630 of its lenders and 89 business borrowers. On average, businesses borrowed £35,000 - from 418 people - at an interest rate of 8.2 per cent.
Small businesses are turning to peer-to-peer lending platforms to help raise capital to expand the business or for working capital. Business owners cite frustrations with slow loan applications at banks as their main reason for joining peer-to-peer lending, over an inability to access credit.
The survey showed that 77 per cent of the business borrowers would go to Funding Circle first for future finance. A third said it is likely or very likely they wouldn't have received external finance had they have not used the platform.
Encouragingly for small businesses, lenders surveyed plan to keep lending in the future - and 75 per cent stated a willingness to increase their lending in the next 12 months
Based on the research, typical lenders to the business borrowers are identified as male, relatively wealthy and have a science, business or finance degree. On average they have lent £8,000 across 67 companies and have a financial wealth in excess of £80,000. Financial return is the main motivation with the interest rate offered and risk rating of the business as the main factors influencing lenders' decisions.
Stian Westlake, executive director of policy and research, Nesta, "It's no secret that small businesses have struggled for access to finance from banks and now P2P lending platforms are stepping into the breach. 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. We are some way off from P2P overtaking high street banks, but we should see it as complementary to the wider financial architecture in the UK and a real help to small businesses."
Samir Desai, CEO and co-founder of Funding Circle said: "Models like Funding Circle provide a fundamentally better service for small businesses. It is vital that we enable growing businesses, which are the lifeblood of the economy, to obtain access to finance when they need it most. Peer-to-peer lending platforms combine speed with efficiency meaning businesses receive funding in days compared to the typical three months it takes with a bank. The future of small business finance is not about big versus small, but fast versus slow."
Notes to Editors:
For media enquiries please contact Sarah Reardon at Nesta on 020 7438 2606 or email [email protected]
All data is based on Funding Circle proprietary data and Nesta survey of investors and businesses using the platform Nesta analysed proprietary data from Funding Circle using survey date from 630 investors and 89 companies.
Funding Circle has facilitated £100m in loans to over 1700 companies to date. It is one the businesses to receive £20m from the Government's Business Finance Partnership.
About Nesta (www.nesta.org.uk): Nesta is the UK's innovation foundation. We help people and organisations bring great ideas to life. We do this by providing investments and grants and mobilising research, networks and skills. We are an independent charity and our work is enabled by an endowment from the National Lottery.
About Funding Circle (www.fundingcircle.com). Funding Circle is the first ever online marketplace enabling British people to side-step banks and lend directly to small businesses. Loans are from £5,000 up to £1 million. Set-up in August 2010 Funding Circle has helped businesses borrow over £95 million - £10 million in the last 30 days. Using the online marketplace you can set your own rate. Each loan is comprised of small amounts of borrowing from many different people who compete to lend to the business in question, this enables the business to borrow at a better rate. With no bank in the middle both investors and borrowers achieve a much better deal with investors receiving an average 6.2 per cent net return on their money.
Photo by William Warby