Fears that small and medium-sized businesses (SME) are not getting access to bank loans to help their firms grow has led to a £110million boost to the fledgling peer-to-peer lending industry.
Business secretary Vince Cable has boosted lenders by offering them £55 million of taxpayer money through the Business Finance Partnership (BFP).
However, lenders will only get the cash if they match what they take from the fund – which should leverage the amount available to £110 million.
£20 million will go to the Funding Circle, a two-year old online loans market place, Boost Capital will also receive £20 million and Zopa will get £10 million and Credit Asset Management £5million.
Cable said: “While the amounts of money involved are small, they should give small businesses more borrowing options, better choice and competitive rates.”
Bank borrowing rival
“There needs to be a more diverse range of finance options – including non-bank lending – to help tackle longstanding, structural gaps in the supply of finance to the market.”
The BFP has a £100 million fund and in 2013, the government will announce where the remaining £45 million is going.
In addition to the cash injection, Mr Cable also gave details of a new 1,000-strong network of business finance advisers to help small businesses.
The BFP is being seen by many in industry as a novel way for the government to break the stranglehold of banks on lending to small business – with firms complaining that the banks’ lending criteria has tightened too much and that the charges involved often make the loans too expensive.
The loans under BFP will typically be for three to five years and will start at £10,000 up to £500,000. The government will be paid the same amount of interest that other peer-to-peer lenders receive, which can range from 6.7% up to 12% depending on the business and their credit rating.
Peer-to-peer lending
Peer-to-peer lending, or crowdsourcing to many people, is a fast growing sector which allows well-established businesses to borrow money from groups of potential investors.
After passing a credit assessment, the business will post their request for a loan on the marketplace – and then wait for the offers to come in.
The attraction for investors is that they can invest small amounts, often ranging from £10, in several companies to help spread their risk.
However, the BFP funding is only a small amount compared to what SMEs really need but there are hopes that a new British Business Bank which is being planned with £1billion of government funding will help meet demand for small business finance.
