Is it true that small and medium-sized enterprises (SMEs) have been turning their back on banks? Have alternative lending options become more attractive to business owners? Even though it’s only 46% of businesses who utilize external finance[1], it’s extremely important that businesses are properly financed because it is mainly used for growth and investment.
Throughout the sections below we’re going to discuss why banks are being shunned by business owners, and we’re also going to discuss the alternative lending options that have increased in popularity recently.
Why Banks Are Being Shunned
The moment you hear that a business isn’t taking advantage of financing from banks, you immediately wonder if it’s because of high interest rates. However, considering that interest rates are at historic lows[2] and are extremely attractive compared to many other financing options, this simply can’t be the reason why banks are being shunned.
So why are banks being shunned? The most logical answer to this would have to be that the alternative lending options are constantly increasing, and are becoming more attractive to business owners. We’ll talk about this more in the next section.
Alternative Lending Options
There is a wide range of alternative lending options for businesses: equity funding, peer-to-peer lending, loan and overdraft borrowing, invoice discounting, and more. SMEs have been utilizing these options to expand their business, instead of asking for help from the banks.
Peer-to-peer (P2P) lending is just one alternative lending option that has been growing in popularity at quite an exponential rate; the average growth of the market is in excess of 250%[3]. P2P lending is attractive for a number of reasons, one of the primary reasons being that it’s accessible. The accessibility of P2P lending means that businesses who need it the most can take advantage of it, and this might be one of the main reasons for the vast growth over the years.
There are many other alternative lending options, P2P lending is just one example. The bottom line is that businesses are starting to focus on options that provide them with more flexibility, banks can be quite strict and definitely place restrictions on SMEs.
Closing Notes
Even though it’s extremely difficult to decipher exactly why SMEs are turning their back on banks, they are clearly doing this for a number of reasons. One of these reasons being that heavy restrictions are often placed upon business owners when dealing with banks, and there are now many alternative lending options that prevent these restrictions.
Going to a bank isn’t the only way to finance your business ventures anymore, a wide range of options are available and they are growing in popularity year after year.
Sources:
1. http://british-business-bank.co.uk/wp-content/uploads/2014/12/BBB_Small-Business-Finance-Markets-2014_Online_Interactive.pdf
2. http://www.bankofengland.co.uk/publications/Documents/other/monetary/trendsapril14.pdf
3. http://www.nesta.org.uk/sites/default/files/understanding-alternative-finance-2014.pdf
