It’s a well known fact that many small businesses have faced severe cash flow problems since the financial crash, when banks cut overdraft facilities and dramatically restricted new lending.
In March, a UK Government report said that the deficit in credit faced by small British businesses is expected to jump to a record high of £60bn by 2016.
Unable to borrow from banks, they have been forced to find new ways of accessing money and peer-to-peer lending is one Government-backed solution which is growing rapidly.
The alternative lending industry has soared in recent years as savers look for alternatives to low rates currently on offer from banks and building societies, while borrowers look to get a better deal on a loan.
Some websites offer funding to individuals while others fund small businesses, with many using an online marketplace inviting people to bid for investment opportunities.
The government sees peer to peer lending as a good solution to the funding gap for SMEs, allocating £100m of taxpayers money to the sector in this year’s Budget.
The market is undergoing a major conceptual shift as this type of lending becomes more commonplace, replacing banks with good value alternative sources of finance, delivering secured business loans swiftly and offering attractive fixed interest rates.
In order to convince critics, it will take time for P2P providers to mature and prove their worth to savers and borrowers, but once they have established a steady track record they will go on to establish themselves as a fundamental part of the lending landscape. In turn this will boost competition on the high street.
If interest rates remain competitive and negative debt continues at the current low levels, the peer-to-peer industry could soon become the best option for many savers looking for a decent return for their cash.
There are some concerns surrounding peer-to-peer lending, particularly surrounding the fact that it is unregulated. It’s a relatively new form of borrowing which does not provide the same solid guarantee to savers enjoyed by ordinary bank customers. But it is important to remember that peer-to-peer providers have their own ways of managing risks, to limit any potential threats to investors’ cash.
Many entrepreneurs are interested in becoming ‘business angels’ as part of their wealth strategy. Successful business people, who have made their own money and perhaps sold their business, are often specifically interested in investing or lending to other entrepreneurs. There are many lucrative avenues for private investors and business angels who are keen to invest through fund structures controlled by private equity firms or through direct funding.
In fact, many successful businessmen make ideal investors for small companies, as they are often more patient during the start up phase and are willing to get involved in the business’s real needs. They may even find they gain a greater sense of satisfaction from their involvement, even if their investments do not deliver exceptionally high rewards.