Since the credit crunch of 2008, small businesses have faced considerable challenges accessing finance through traditional high street banking routes. The current picture suggests that there is little sign of this improving in the immediate future.

Our figures suggest that around four in 10 small firms are struggling to access finance and one in five firms cite access to finance as a barrier to growth. The Bank of England’s own most recent figures show that lending to small firms in the first quarter of this year was down 4% on the previous quarter and by 3% on the year. We have seen no evidence to suggest that the picture is any different in Wales.

Banks have tightened up their criteria for lending as they look to protect their balance sheets. Likewise, the trust of some businesses in banks has been damaged by issues such as the mis-selling of complex financial products, notably interest rate swaps.

Against this backdrop, interest in alternative sources of finance such as peer-to-peer lending and crowd funding is growing and worthy of further exploration.  The FSB is keen to see what additional measures can be made by the UK Government to increase the scale of non-banking channels like these.

One of the major issues is that such alternative sources of funding are not regulated which may make businesses reluctant to access funds in this way. While some small businesses have a well-developed understanding of these types of funding, many would benefit from extra support that does not automatically assume an unrealistic level of knowledge, potentially laying businesses open to exploitation.

A recent report by the FSB recommended that the UK Government and regulators show the future importance of peer-to-peer and crowd funding models by engaging the p2p Finance Association along with key players in this market. These key players should then be brought into a fully recognised regulatory environment that would help to attract a greater number of institutional investors to meet the demand from small businesses.

Once a suitable regulatory environment has been established, the Government could create investor accounts in the peer-to-peer firms that lend to small businesses and use this as an alternative route to the banks under the credit easing umbrella. This would help to increase competition within the SME credit market.

Naturally, crowd-funding and peer-to-peer lending may be more suitable for some forms of businesses than others. There are notable examples of software and consumer technology businesses raising funds through crowd funding, but some businesses might find it more difficult to raise money in this way.

In Wales specifically, there is also an issue over whether there is a large enough base of sufficiently wealthy individuals to act as peer-to-peer funders. If Welsh businesses are to seek funding in this way, it may be that they have to tap into a network of lenders at a UK level, rather than relying on individuals nearby.

However, in the current climate, non-bank access routes to finance are increasingly important in supporting and encouraging small businesses to thrive. Crowd funding and peer-to-peer approaches are one option worthy of further exploration.

Iestyn Davies is Head of External Affairs at the Federation of Small Businesses, Wales

Peer-to-Peer Lending, Crowd Funding for Sustainable SME Growth
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