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The growth of Alternative Lending: Why online lending platforms are filling the SME funding gap

Sachin Patel, Chief Capital Officer

LinkedIn profiel

It was widely observed that after the financial crisis bank lending to small businesses retrenched. It is less well recognised that ten years on, the most creditworthy small businesses still struggle to access finance through traditional routes.

Alternative Lending | IIR

 

Central bank data suggests that the stock of bank loans to small firms is growing less rapidly than for larger corporates. In the Netherlands for example, the data shows that bank lending to non-financial businesses has fallen substantially in recent years, and information collected from the three major Dutch banks indicates that this downward trend has been more pronounced for loans extended to small businesses[1].

A less accommodating stance by banks and the advent of technology has led small businesses to seek alternative access to finance. Similarly, an investor community that has suffered from a decade-long trend of low yields has been looking for ways to gain access to the previously unavailable micro-SME credit asset class. Lending platforms have stepped in to fill this gap.

Attracting a diverse investor base

By lending directly and efficiently to small businesses, investors are able to earn stable, attractive returns while supporting the backbone of the economy.

The asset class itself is by no means a new one, indeed banks have historically lent to these small businesses for decades through their branch networks. What is new is the ability for institutional investors to access the asset class in an efficient and scalable way. The largest platforms have repackaged loans into various investment vehicles which have proved an attractive proposition given the high yielding, short duration characteristics of the underlying loans.

Serving a diverse mix of investors ensures the longevity and sustainability of platforms as they scale. At Funding Circle, this includes over 80,000 individual retail investors, banks, asset management companies, insurance companies, government-backed entities and funds.

Together, these investors have lent over €6.1 billion to more than 50,000 businesses globally, whilst earning attractive returns.

A big market opportunity

There are over 150 million small businesses in the world, driving productivity across their local economies. In Europe, small businesses account for more than 99% of all enterprises, so access to finance for growth is critical to the success of the economy.

Over the years, partnerships between lending platforms and traditional lenders have increased, helping even more small businesses access the finance they need to grow. We expect to see more of this in the future, as these tie-ups allow banks to keep their customers happy by referring them to us when they are unable to support their financial needs.

In addition, lending through Funding Circle is powering the global economy. Research from Oxford Economics found that when a business accesses finance through our platform, a ripple effect is seen through supply chains further boosting local communities. In 2017 alone, this activity unlocked 75,000 jobs across our four markets.

Revolutionizing a broken system

When Funding Circle was founded, we could see that businesses were not able to access the finance they need to grow, and at the same time, investors were making poor returns on their money. We had a simple idea: let them support each other.

The benefits of the lending platform model are two-fold: creditworthy small businesses can borrow quickly and easily to reach their goals, while investors can earn an attractive return and make a difference by lending to them.

We believe it is better for everyone.

Alternative Lending | IIR

 

[1] De Nederlandsche Bank, Key indicators monetary statistics – February 2018. De Nederlandsche Bank, Lending by Dutch large banks to the Dutch SME sector, January 2018.

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