The Lines Are Blurring Between Alternative, Traditional SME Finance

Alternative lending has shifted from a competitor of traditional FIs to a collaborator, often lending a digital hand to banks in need of upgrading their systems to provide faster, more agile financing to SMEs. A new report from the state-backed British Business Bank (BBB), however, suggests alternative lenders are becoming an increasingly important part of its operations in a different way, highlighting how the lines between alternative finance (AltFin) and traditional finance continue to blur.

The BBB’s report, released this week, delivered news that 94 percent of its SME finance was channeled through FIs other than the U.K.’s Big Four banks, with alt lending firms and P2P lenders acting as key vessels for BBB funding.

The annual report said the BBB facilitated more than $930 million in SME loans last year, and, according to the data, every year more of that money is landing at small businesses thanks to collaboration with alternative lenders like RateSetter and Funding Circle. According to reports, in 2014 the percentage of BBB funds that went through a P2P platform was 79 percent; in 2015, it was 90 percent.

The British Business Bank is not only relying on these players more, but according to its research, more small business owners are aware of their AltFin options, with researchers finding that 50 percent of SMEs said they were aware of these options, up from 48 percent in 2015.

“Over the past year, we have delivered strongly against our four key performance indicators, broadening our support to provide more finance and extra choice for smaller businesses at all stages of their growth,” said BBB Chief Executive Keith Morgan in a statement. “It has been a year of significant expansion, as our market impact continues to grow, we are well-placed to respond flexibly to challenges ahead, helping to increase the amount and range of finance available to smaller U.K. businesses.”

The BBB, which was established by the government for the purpose of facilitating access to capital for SMEs, has worked with alternative lending firms to meet its goals. Earlier this year, the BBB said it would provide more than $52 million in small business loans to be provided via Funding Circle.

But the BBB also works with traditional players. In 2015, it struck a deal with Hitachi Capital to provide a $151 million credit facility for the purpose of asset and equipment financing.

And even as the BBB increases its use of alternative and P2P lenders to finance the nation’s SMEs, the bank is also watching the industry closely, as it threatens traditional FIs’ status quo.

“The centerpiece of the P2P offering is the level of information, convenience and speed, which add up to a compelling customer experience,” said the BBB’s Morgan in a statement last April. “I think P2P is here to stay, but I’d certainly expect the banks to react, as any business would react commercially.”

U.K. banks are now required to refer their SME clients to an alternative lender should they be rejected for a traditional loan, and many FIs in the nation are striking partnerships with these P2P platforms so that even if a SME is referred to an alternative lender, the bank referrer still has a hand in the deal, whether by providing the actual working capital or otherwise.

Meanwhile, some FinTechs want traditional banks to begin acting more like their alternative peers and competitors by offering faster digital applications and approval experiences to SME clients.

But with more traditional banks striking their own partnerships with AltFin companies, the lines between alternative and traditional financing continue to blur. As the U.K. works to address the issue of late supplier payments and the uncertainty caused by Brexit and other market forces, small businesses are struggling to access capital.

“There is no doubt that U.K. SMEs are facing a working capital crisis at the worst possible time,” said Tony Duggan, chief executive of Crossflow Payments, in a statement earlier this month expressing his concern for the current state of SME finance in the country. As some industry players believe, collaboration between traditional and alternative financiers may be the key to relieving that crisis, especially as awareness of alternative options increases among small business owners.