Analysts are no longer confident that alternative players will disrupt the SME lending space as once thought. Still, others remain sure the sector is doing just fine. Amid all the chatter, PYMNTS takes a look at cold, hard data to assess whether alternative SME finance is in trouble or not.
More than $109 million was invested in alternative lending by state-owned British Business Bank (BBB), according to reports last week. The use of U.K. taxpayer money to invest in alternative lending suggests the BBB is confident in the success of the sector — despite a report released by the Financial Conduct Authority earlier this month that found potential lapses in investor protections among alternative lending players. According to reports, the BBB invested nearly $75 million in Funding Circle, nearly $19 million in MarketInvoice and about $12.5 million in RateSetter, according to documents obtained by Business Insider. The U.K. has also recently introduced legislation that requires traditional banks to refer SMEs to alternative lenders should they be rejected for a bank loan.
$94 million in venture capital was provided to alt-lending startups last week, which signals that some venture capitalists aren’t concerned over doubts of the future of the industry. The funding landed at three players: India’s Indifi raised $10 million, while, in the U.S., BillFront raised $35 million and BlueVine secured $49 million. It’s a major show of support for a sector that fell on rough times this past year, but as other data shows, not everyone is confident the alternative SME lending space can endure.
$1 million in loans have been funded to SMEs thanks to the Prospa and Reckon partnership, the companies said last week. SME alternative lender Prospa linked with accounting platform Reckon to facilitate small business lending, and about five months later, the companies have surpassed the $1 million mark — a show of support for the alternative lending sector overall. In a statement, Prospa CEO Beau Bertoli said that the milestone “means we’re having a major impact.”
82% of SMEs plan to grow in 2017, which is likely to mean their borrowing demands will increase. The figure, provided by the 2017 Small Business Outlook survey released by Insureon, said that SMEs are looking at investing in new equipment, new product offerings or new hires to expand in the year ahead. While the data suggests optimism among the U.S.’s small businesses, Insureon noted that expansion can often lead to risk exposure for SMEs. One of those risks could be borrowing practices, and as small businesses seek capital for growth, deciding between a traditional or alternative lender may prove to be a critical decision in their expansion plans.
The 59.2% loan approval rate among alt-lenders isn’t a good sign, considering that the figure represents yet another decline in SME alt-lending approval rates as shown in the latest Biz2Credit Small Business Lending Index. And as those rates drop, bank loan approval rates to small business applicants are rising. Biz2Credit CEO and Cofounder Rohit Arora expressed doubts over the future performance of the alternative small business lending sector and not just because loan approval rates have declined. “CAN Capital, one of the largest and oldest players in alternative lending, has stopped lending money and replaced CEO Dan DeMeo,” he said. “Alternative lenders have lost favor because of the high rates they charge.”
A 0.5%–0.75% target for the federal funds rate is likely to lead to higher borrowing costs for both SMEs and consumers that seek financing from traditional banks. The rate target was set by the Federal Open Market Committee at the Federal Reserve as it raised the national interest rate last week and was the first unanimous decision from the committee since July, reports said. It’s unclear if or how that target, which sets the lending rate between banks, will impact small business lending levels or whether higher bank loan costs could push SME borrowers to alternative players. Still, borrowers will need to watch how interest rate adjustments impact their own borrowing costs.