Raising Finance

Banks shunned as SMEs and investors turn to peer-to-peer finance

3 min read

26 April 2013

Research predicts that peer-to-peer lending has potential to deliver as much as £12bn in business lending annually.

Britain’s small businesses are turning to peer-to-peer (P2P) lending platforms to raise capital, and the majority say that they won’t go back to banks for future finance. These are the findings from “Banking on Each Other“, the UK’s first independent research into P2P lending to businesses from Nesta.

Banking on Each Other is published following the release of Bank of England’s latest Trends in Lending figures last week (19 April), which showed net lending by the high street banks to have declined by £5bn – 25 per cent more than the previous quarter.

The report revealed that peer-to-peer lending could emerge as a challenger to the existing model of bank lending. Currently P2P business lending is a small market, accounting for £120m annually. But based on the trends and motivations of lenders in the research, Nesta predicts that P2P has potential to deliver as much as £12.3bn in business lending annually.

SMEs are turning to peer-to-peer lending platforms out of frustrations with slow loan applications at banks, so Nesta. Encouragingly for small businesses, lenders surveyed plan to keep lending in the future – and 75 per cent stated a willingness to increase their lending in the next 12 months.

Funding Circle, the UK’s largest P2P business lending site, provided the project with proprietary data and a survey of 630 of its lenders and 89 business borrowers. It showed that on average, businesses borrowed £35,000 – from 418 people – at an interest rate of 8.2 per cent.

Based on the research, typical lenders to the business borrowers are identified as male, relatively wealthy and have a science, business or finance degree. On average they have lent £8,000 across 67 companies and have a financial wealth in excess of £80,000. Financial return is the main motivation with the interest rate offered and risk rating of the business as the main factors influencing lenders’ decisions.

Stian Westlake, executive director of policy and research at Nesta, said: “It’s no secret that small businesses have struggled for access to finance from banks and now P2P lending platforms are stepping into the breach. Coupled with the recession, it’s the explosion of social media and the use of the internet that has made it easier and cheaper to connect those who want to invest with the businesses that need finance. We are some way off from P2P overtaking high street banks, but we should see it as complementary to the wider financial architecture in the UK and a real help to small businesses.”