The U.K. has only just implemented new legislation aimed at increasing small businesses’ access to financing, whether through traditional banks or alternative lenders. But already, the effects of government efforts appear to be materializing.
New research published by Amicus Finance PLC only weeks ago found that small businesses are beginning to prefer alternative lenders over traditional banks, and experts say the data will likely continue to sway in favor of the alt-lending sector.
But the research also highlighted some potential caveats that may impede small businesses’ opinions of the emerging sector, indicating that while SME sentiment for alt-lenders is expected to improve, it still has a long way to go.
Amicus Finance’s research found that nearly half of SMEs (45 percent) agree that alternative lenders provide greater flexibility than traditional banks, while more than two-thirds said alt-lenders have a greater ability to lend to small businesses compared to their mainstream banking counterparts.
Analysts said that these figures are growing. Nearly two-thirds of businesses surveyed said they expect alternative finance demand to increase in the next two years. Amicus Finance noted that this sentiment coincides with the implementation of a new bank referral scheme, which requires that traditional banks refer SME loan applicants to an alternative lender should they be rejected for financing.
The legislation is a result of plummeting SME loan approval rates within traditional lenders following the financial crisis. “Given the challenges faced by banks in recent years,” said Amicus CEO John Jenkins, “it’s little surprise that many small business owners feel they’ve missed out on exciting deals and growth opportunities due to lack of support.”
He added that SMEs turning to alternative lending sources consider these players a “breath of fresh air.”
The figures could signal the early onset effects of the bank referral lending scheme as well as other legislation that aims to strengthen SME’s access to financing. While small businesses predict a rise in alt-lending demand, the data shows definitively that the U.K. alt-finance market is expanding. According to the Liberum AltFi Volume Index, the U.K. alternative lending market grew by more than 116 percent this year compared with 2014. The data suggest that P2P business lending will soon surpass consumer lending in volume.
While Amicus Finance’s Jenkins focused on how the latest figures signal an increase in alternative lending popularity, the study also uncovers some not-so-positive aspects about the state of alternative lending in the U.K.
For example, the research found that that only one-quarter of SMEs surveyed agree that alternative lenders offer better customer service than traditional banks. Only 22 percent said that the speed at which alternative lenders operate is a factor that makes them more attractive than traditional banks.
These figures could be the result of a lack of understanding of the sector. According to research published in March by the UK Bond Network, only about half of small businesses in the U.K. are not sufficiently knowledgeable about their alt-lending choices. The larger the business, the more likely they are to consider an alternative lending option, the research found.
What’s more, while the U.K. has one of the most robust alternative lending industries on the planet, the market may actually be too large. Research from Funding Centre published last April found “dramatic” growth of the market, and that SMEs find that expansion to be “daunting.”
With U.K. legislation aimed at strengthening SME’s access to financing still in its infancy – and with the alternative lending sector itself in its early days – small businesses, it seems, are not entirely convinced that alt-financing options are better than the banks. Whether it’s because small businesses are still unclear about their alt-lending choices or because they are overwhelmed with funding options cannot be determined.
But Amicus Finance’s new research does make it clear that the alternative lending industry is growing and demand will likely see a steady increase over the next few years. The industry seems to agree.
Funding Circle co-founder James Meekings recently told The Financial Times that historically, the U.K.’s four main banks have accounted for 90 percent of business lending, indicating that the P2P sector has a “long way to go” to boost its awareness among SME borrowers.
But the sector is on its way, said Stuart Law, the chief executive of P2P lending platform Assetz Capital. “In terms of business lending,” he told the publication, “you ain’t seen nothing yet.”