More Small Businesses Exploring Borrowing From Individual Investors
Microlending and peer to peer lending are expanding as more business owners explore these lending options.
Here is the press release:
August 31, 2012 — As the UK economy is falling deeper into recession and the euro crisis continues to threaten financial markets, many businesses are losing confidence in banks.
The increasing rate and price of bank loans indicates credit supply is currently an issue. Recent data shows lending to businesses fell in June, along with bank lending to smaller firms. Rates paid by firms on bank loans have risen by 0.16 % to 3.12%, since June last year, which is significantly above the Bank of England’s base rate of 0.5%. Unpredictable stock markets are making businesses anxious and consequently, some companies are looking to raise money directly from savers and many are turning to inflation-beating retail bonds.
The international finance rules on the level that capital banks must set aside against different sorts of loans (known as Basel 3) makes small-business lending an expensive arrangement. Scarcity of bank credit is set to continue until business confidence finally recovers, raising concerns over how to fund the gap left by retreating banks.
For a large proportion of entrepreneurs, the opportunity to borrow directly from individual investors has presented new opportunities. A number of finance firms have quickly responded to this growing demand with Shawbrook Bank and Aldermore recently established to provide small and medium sized businesses with banking services. As consumer disillusionment with traditional providers’ increases the UK is seeing a new species of “peer-to-peer” lenders emerge which allow consumers to bypass banks and explore their business options on the open market.
Small but fast-growing online companies such as Market Invoice and Funding Circle put businesses in need of cash in touch with powerful investors or cash-rich companies. They allow individual savers to supply funds to small businesses and are now preparing to compete for up to £100 million of UK government money intended to trigger more growth in the market. It’s uplifting to see that this source of finance is growing in popularity as it is increasingly accepted as a credible alternative to banks.
In contrast to mainstream banking this new type of finance is in its early stages of development and has a long way to go. Recently Zopa had its seventh birthday and last month Squirrl.com was launched, aimed at lenders looking to invest in secure loans in order to establish companies. There’s also a new offer by Seedrs.com that lets small investors invest in new business with a minimum investment of just £10 per business, which means users can spread their investment risk across a number of companies.
Nevertheless, with all of these sites there are no guarantees and nothing is risk free. Customers that use these sites are not protected by the Financial Service Compensation Scheme, which protects customers’ funds held in a single financial institution in the off chance that it fails. The peer-to-peer market is celebrated by some for a filling a financial gap and it is certainly a valuable development in the lending market, but investors and small businesses do need to be aware of the risks.