Peer to peer lending, a form of alternative finance that relies on small loans between individuals, is growing despite the inherent risks that are involved. A businesses seek new ways to ease cash flow problems, non-bank funding such as invoice finance and peer to peer lenders are playing a key role in UK recovery.
Peer to peer lending networks were originally developed as a way for people to lend spare funds to one another. this has been expanded, so now there are ways for small businesses to make use of the system. They only account for a fraction of UK business lending – about £100m-£200m – but this is proving to be a growing trend.
Alternative funding options are growing in profile as they attract the interest of policy makers looking to put the UK economy back on track. SMEs are believed to be a key ingredient for economic growth, but this is impossible without an abundance of funding options.
In the Budget last month, George Osbourne marked out £100m of government funds for non-bank funding channels, such as peer to peer lending.
Andy Haldane, head of policy at the Bank of England, has suggested that we may eventually see peer to peer lending networks overtake bank funding in the UK. However, the Federation of Small Businesses claims that only a small percentage of SMEs are aware of the existence of peer to peer networks.
Peer to peer networks mean that investors get a higher return on their money than if they invested it in a savings account, and businesses get faster access to money than through bank channels.
The SME funding environment is changing fast. From reliance on the big banks, businesses are now investigating alternative methods of funding.
Peer to peer networks do have risks. Lending is unregulated, and lenders are not protected by financial services protection schemes. If there were problems with this method of funding, then it’s likely that the networks would quickly collapse.
Asset based finance, invoice discounting and peer to peer lending look set to grow in 2012.