Alternative lending was supposed to be the way SMEs broke through banking barriers to gain access to capital, enabling them to boost growth opportunities, investment options, commercialization of innovations and employment.
But recent data shows that businesses aren’t lining up outside alt lenders’ digital doors as expected — at least in the U.S.
Stateside, recent Freshbooks research found that only about a tenth of entrepreneurs have used some form of alternative finance. This is not entirely unusual, as alternative lending is still a relatively new and growing category.
Tellingly, while most entrepreneurs reported wanting more alternatives to big banks, 75 percent said they are uncomfortable or unsure about working with an alternative lender in the future.
But the story is a bit different across the pond according to Christoph Rieche, CEO and cofounder of U.K.-based alternative lending FinTech iwoca. While he noted that while overall adoption is still somewhat low, alternative lending is seeing greater growth in terms of volume and consumer awareness in the U.K.
“Public data sort of shows that bank approval of new loans drafted in the UK is still very low,” Rieche said.
This unlike in the U.S., where big banks have continued to increase their lending to SMEs. This signals another key difference — in the U.S., small banks reduced their SME loan approval rates for the first time in six months, the Freshbooks report found. Alternative lenders’ SME loan approval rates also declined.
But in the U.K., people and small businesses have greater reason to look outside traditional banking, Rieche said, come to the alternative lenders that are now operating in the market even more frequently.
Another key factor may be recent legislation.
“The government here has been active incentivizing borrowers who are rejected from banks to go further,” Rieche said, referring to the program the U.K. began last year which requires traditional banks to refer small businesses to alternative lenders if they’re rejected for a loan.
“While it’s still young,” Rieche said, “it’s a sign that alternative lending is on the rise.”
From iwoca’s perspective, the SMEs that seek alternative financing range across industry categories, indicating that no one market in particular holds more or less interest.
Still, there's room for improvement even in the U.K. And the biggest reason why prospects don’t seek out alternative lending, Rieche said, is as simple as entrenched behavior and lack of awareness.
“In our culture, the bank is the provider of financial services. You have an ongoing relationship with them from when you are very young — that’s the narrative for most people,” Rieche said. “If the bank decides that they should not have credit, then a lot of people don’t go much further than that.”
For their part to grow the number of SMEs accessing alternative lending, iwoca has recently integrated with cloud accounting software provider Xero. This allows small businesses to access iwoca and other lenders and other business finance providers on a marketplace that sits within their own accounting system.
“Our customers are already on Xero’s platform multiple times per week or month to managing their financials,” Rieche said. “If they decide our credit line is right for them, we’ll be able to either approve these customers instantaneously to within a few hours.”
Financing is integrated directly into the accounting tools. Once the credit activity is effective, funding is immediately reflected in the SME’s account information.
With the Xero integration, iwoca hopes to cut back on the operational and behavioral barriers that prohibit the growth of alternative financing in the U.K. and SME’s access to alternative sources of capital.
“I’d love to say it’s a quality of the alternative lending sector in general that people want to try it,” Riech said, noting that while significant progress has been made, there’s still much more to be done in the U.K. and elsewhere.