With all the emphasis on the importance of small and medium-sized businesses in the UK’s economic recovery and growth, the problem of financing for those SMEs has been a subject of much controversy and indignation. SME owners complain that bank financing is too expensive and too restricted; banks are leery of lending money to start-ups and business entrepreneurs.
A relatively new source of funds is beginning to look as if it may take the place of banks, at least for some SMEs. It’s known as peer-to-peer or social lending, or P2P. It started a few years ago as a way for small investors to loan spare cash directly to another private party, usually a friend or associate. The idea was to cut out the fees and paperwork involved with banks and brokers, and make the transaction easier and more profitable for both parties.
The idea took hold in a big way, and by now even the government is getting behind it. In his last budget statement UK Chancellor George Osborne earmarked £100 million in government funds for P2P and other non-traditional lending sources, as part of his ongoing efforts to make more funds available to SMEs.
However, that’s just a drop in the bucket of what’s needed, and FSB (Federation of Small Businesses) says only a small fraction of its members are even aware of the P2P opportunities. Currently, total SME loans through peer-to-peer channels only amount to between £100m to £200m a year.
With the P2P setup, ideally a lender/individual can get a better return than by putting the money into savings, and generally in a much shorter time. The borrower gets faster, easier access to funds at less cost than with traditional lenders (banks). The first P2P company to have an established presence in the UK was Zopa, created in 2005, but at present there are five well established groups and more on the way.