Small and medium-sized businesses (SMEs) are a fundamental part of the UK economy. They employ two-thirds of the private sector workforce and generate turnover almost equal to that generated by the country’s largest businesses. A vibrant, growth-orientated small business landscape requires choice and competition. Unfortunately, these are things not always reflected in the finance options taken up by smaller businesses. For a long time, the scale and diversity of our SME community has not been matched by the finance options used by them.
The British Business Bank was established in 2014 to address this concern and make sure that smaller businesses have access to the finance that they need to invest, to grow and to achieve their ambitions. Fortunately, the market is evolving and there is an increasing range and awareness of alternative forms of funding. Alternatives like peer-to-peer (P2P) business lending.
Historically, and often still the case today, small businesses looking for finance would approach their high street bank. If their application for funding was rejected this could, for many, have seemed like the end of the process. This has, no doubt, stymied many businesses from reaching their full potential.
The Bank and I are committed to ensuring a greater range of options for SMEs to enable them to find the right finance for them. P2P has been of interest to us as an innovative financing solution for smaller businesses looking to grow. When we support a small business finance product, or help an alternative provider, smaller businesses benefit from better choices and the greater value that increased competition brings. This is why a stated aim of the Bank is that more than 75 per cent of our finance is delivered through providers outside the “Big Four”. In 2016/17 we reached 94 per cent, up from 90 per cent in 2015/16.
We recognised the potential of P2P and in 2013 the Bank took early steps to help stimulate the sector through committing funds to new platforms. Those interventions have yielded real benefits. British Business Bank Investments Ltd, our commercial arm, has partnered with platforms including RateSetter, MarketInvoice and Funding Circle. More than 14,500 businesses have already benefitted from the lending we channelled through Funding Circle alone, supporting around 40,000 new jobs.
The arrival of P2P companies in the UK over a decade ago was proclaimed by some as the start of a lending revolution. One Bank of England policymaker even suggested that the nascent industry might one day even replace traditional lending. This has, of course, not yet transpired. Although P2P business lending to smaller businesses grew to £1.31bn in 2016 (£3bn cumulatively) a growth of 34 per cent from 2015, it remains a relatively small part of the market compared to gross bank lending which reached £59.2bn in 2016.
While traditional lending does not look like it is going anywhere anytime soon, P2P offers so much potential because it is built upon technological change and innovation. Although clearly price is important, our research suggests this is just one of many factors smaller businesses consider. P2P does not always compete on price alone, and offers SMEs these core customer service attributes: speed of access, simplicity of use and flexibility in choosing a financing product that best meets their funding needs. The speed of the approval process is a huge advantage to businesses who do not have the time to wait for lengthy financing and want to focus on the job of running and building their business.
New entrants, like the growing P2P providers, have injected valuable choice and competition into the market. What is more, they are also helping to encourage innovation amongst the traditional incumbents along the way. The advent of P2P platforms has prompted the banks to reconsider their online offering. For example, Royal Bank of Scotland unveiled plans earlier this year to launch a new digital platform – Esme – which will allow SMEs to quickly obtain unsecured loans of up to £150,000 under its NatWest brand, featuring a panel of five P2P and alternative lenders.
The creative tension between new entrants and incumbents works both ways. P2P platforms, recognising the market share enjoyed by traditional lenders, have also adopted and incorporated some of the characteristics of established financial service providers. For instance, they have diversified their product offering – such as Innovative Finance ISAs – brokered new partnerships and some have even opened local branches. This type of healthy competition has helped to drive improvements across the lending market with small businesses and start-ups the prime beneficiaries.
The UK occupies a strong position at the vanguard of Fintech. London, which has such a prominent financial services sector as well as a vibrant technology hub, is proving itself to be a significant driving force for a sector going from strength to strength. Fintech is an important focus for the Bank as we move to support a more diverse financial market. It is a jewel in the crown and is helping the UK to enhance competition across sectors, fostering innovation that benefits businesses and consumers. This is why we support such a strategically vital sector via our funding to smaller businesses through P2P platforms and other Fintech investments such as Ebury through the Angel Co Fund.
Investment in P2P platforms not only creates choices and helps unlock important finance for smaller but has also earned attractive returns. Over the last three years, Funding Circle figures show that British Business Bank Investments Ltd earned a 6.2 per cent annual net return by lending to small businesses through the platform, totalling £5m in cumulative net interest on behalf of the taxpayer.
But while we are convinced of P2P’s merits, there is still work to be done on getting that message out even further. P2P still suffers from a low profile relative to other forms of lending. This is even more pronounced at a regional level where our research shows fewer than 40 per cent of firms in the Midlands or the North are aware of P2P, compared with almost 60 per cent in London. This is why we work with the industry to provide clear information of the finance options available to smaller businesses through initiatives such as our Business Finance Guide.
We need to ensure that we continue to raise awareness of P2P lending amongst smaller businesses – together with all forms of alternative finance – as more choice leads to better outcomes for them and the UK economy. If the P2P industry continues to focus on the needs of its customers and uses technology to effectively deliver what they value the most (speed and simplicity), it will remain relevant for years to come.
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