A rapid increase in the use of alternative funding solutions will accompany a sharp rise in overall business lending from next year, according to Ernst & Young
With the reputation of the banks taking somewhat of a nosedive over the past five years, SMEs have been seeking out alternative solutions for their lending needs – and it’s safe to say that crowdfunding and peer-to-peer lending platforms have proved a popular choice. Well, to give an impression of how services such as CrowdCube and Funding Circle have been received by the business community, the latest financial services forecast from the Ernst & Young (E&Y) ITEM Club predicts peer-to-peer lending to grow fivefold in the next three years, hitting a staggering £1bn by 2016. Whilst we are not all that surprised by a general estimate for growth in such platforms, the scale of the increase is remarkable indeed, especially as the banks finally seem to be turning a corner when it comes to helping out the nation’s credit-hungry SMEs.
Figures released yesterday by the Bank of England showed that lending to small business had seen its biggest month-on-month increase in two years. A £238m rise between May and June meant SMEs borrowed a total of £170.4bn in June, and this is all against a backdrop of a decline in bank lending to small and large business since 2009. In addition to all the other positive signs of late that the economy is on the mend, this should be welcome news to all concerned, not least a government that will feel its growth measures are starting to take hold. Nevertheless, one has to think it will take some time for the damage to be fully repaired when it comes to the relationship between SMEs and the banks, and this could in part explain the predictions put forward by E&Y. It adds that whilst business lending is expected to hit a five-year low at £422bn in 2013, it is forecasted to grow by 7% in 2014 and 10% in 2015, and to have surpassed the 2008 peak of £602bn by 2017 – amounting to 40% higher than its current level.
However, alternative funding options are still expected to skyrocket, not least because they often tend to offer a more cost-efficient option than traditional avenues. “Alternative finance for SMEs will not fall away just because business lending is going to bounce back,” said Carl Astorri, senior economic adviser to the EY ITEM Club financial services forecast. “SME lending is still very expensive for banks, especially given some of the regulatory pressures on asset quality, and some of the funding gap will continue to be filled by non-bank lending. Private equity companies, hedge-funds and asset managers have all been mobilising to fill the gap. We also expect peer-to-peer lending to grow rapidly in the next few years as demand for funding from SMEs outstrips supply from the banks.”
Taken together, the Bank of England and Ernst & Young’s figures paint a pretty rosy picture for the future – one in which SMEs will have confidence in whatever lending route they choose to go down.