Peer to peer lending is a growing part of the alternative finance sector. Today, we explain why Britain needs people to business lending and the three main reasons to welcome P2P Lending.
Flick through a newspaper these days and it won’t take you long to find a story about how the lack of finance is stifling the growth of British business and potentially slowly down economic recovery.
Whilst small businesses claim that banks have pulled down the lending shutters, the big high street banks complain that there just aren’t enough creditworthy borrowers to go round.
As the debate continues to rage, people are starting to ask why we even need banks at all?
Actually, there are some very good reasons why all of us should be gunning for a healthy, well managed banking system. As Robert Peston recently argued, without the banks, “we’d all be a lot poorer… they provide about four-fifths of our financing needs”.
That’s not to say, however, that the banks don’t need a helping hand to get Britain back in business. Three key issues make the current model of small business financing ripe for review:
The Funding Gap – The recent report on the supply of credit for businesses, requested by Vince Cable and prepared by Tim Breedon (ex CEO of Legal & General), revealed that the total stock of lending to UK small businesses has fallen by £151bn since December 2008.
This sharp decline will lead to a gap between what British companies need to borrow and what banks are willing to lend. Breedon estimates that gap might reach a whopping £191bn within the next 5 years.
Capital regulations – Meanwhile, banks are being encouraged to increase their capital bases. Rather than lend money out to borrowers, regulations such as Basel III say that banks should hold more cash in reserve, ready to cushion the blow if the worst happens and the banking industry experiences a set of financial shocks similar to those which rocked the world in 2008.
That sounds eminently sensible but already a picture’s emerging of borrowers who need to borrow and banks who need to save. The losers aren’t just the small businesses that are finding their credit lines restricted, it’s you and me and everyone else who depends on small business growth to fuel economic success.
Choice – Finally, there’s the small issue of choice. We all know that monopolies are discouraged; that too little competition means that people generally get a poorer deal.
Of course, we’re not saying that business lending in Britain is a monopoly – far from it, as all of the big high street lenders have committed to lending targets under the government’s Project Merlin.
We are concerned, however, by research carried out by the Federation of Small Businesses. They found that in the US, small businesses are “spoilt for choice when it comes to raising finance”. There are 15,000 financial institutions in the US competing for business, of which 50% are banks and 50% are credit unions.
Here in the UK, meanwhile, five key banks control 90% of all lending to small and medium sized businesses.
It doesn’t take an expert to realise that if those same five banks are being told to grow their capital reserves a funding gap will emerge. It’s a funding gap that will only grow if no one steps in to help the banking system service the demand for debt financing, and it’s a funding gap that’s crying out for a healthy, eventually regulated, industry in peer to peer lending.