SME alternative finance now worth £76 billion a year
24 August 2015
UK SMEs are now using £76 billion of alternative finance* as banks continue to pull back from lending to smaller businesses, says Funding Options, the online business finance supermarket.
Funding Options says that alternative lending to SMEs is now equivalent to 46% of the value of traditional term loans and overdrafts, which have fallen to £163 billion**. That represents a fall of 5% from £172 billion a year ago, and 17% from £197 billion four years ago.
It says that many small businesses that were once dependent on loans from high street banks for their funding are now exploring a range of alternative finance choices, including invoice finance, leasing, non-bank commercial mortgages, crowdfunding, and peer-to-peer lending, to drive their growth.
Funding Options says that banks are being forced to continue to reduce their exposure to small business lending, as regulators class it as riskier than other in-demand forms of lending, such as residential mortgages and loans to larger businesses. This means banks are forced to hold more regulatory capital if they increase their small business lending.
Several Government schemes aimed at encouraging increased lending to SMEs, such as the Funding for Lending Scheme and Enterprise Finance Guarantee, have so far failed to make the desired impact.
Conrad Ford, CEO of Funding Options, comments:
“Alternative finance has now passed its tipping point. It is now used by a huge number of SMEs in every sector of the economy, and is closing the gap with bank lending.”
“It might be alternative in name, but it’s now completely mainstream.”
“Virtually any business can now find a workable solution to its funding needs through the vast range of options available in alternative finance.”
Funding Options says that some of the largest contributors to the growth of alternative finance include:
- Invoice finance and asset based lending: £18.9bn currently in use by all businesses, with £9bn specifically in use by SMEs (provided by members of the ABFA)
- Asset finance and leasing: £27.1bn provided to all businesses in the last 12 months (provided by members of the FLA)
Funding Options adds that the British Business Bank’s alternative finance referral scheme, for which its platform was shortlisted in July, will be a crucial tool in ensuring small businesses get the funding they need to grow and thrive.
Says Conrad Ford:
“The biggest hurdle for alternative finance is making sure SMEs know about all their options. Most are aware that there are other choices if your bank isn’t able to lend to you, but there is still a lack of knowledge of the specifics.
“For some, invoice finance can be a great, scalable funding tool. For others, a crowdfunder can provide exactly what they need. But too many SMEs are unaware of how to get the ball rolling.”
“If the British Business Bank implements its alternative finance referral scheme in the right way, it can help to bridge the knowledge gap that still exists.”
* Source: Companies House filings of 180,000 SMEs
** Source: Bank of England