During a recent interview Stephen Hester, CEO of RBS, claimed that the bank had £20 billion of money to lend to small businesses but that he “could not force companies to borrow” and that business confidence was the main obstacle holding back demand for credit.
While the current economic situation remains precarious, to assume that the bottleneck with bank lending is down to a lack of confidence is misplaced, representing a failure to understand the more fundamental issues holding back businesses from accessing finance at present: speed.
Currently, a business owner looking for a loan from a high street bank must walk into his local branch, sit down with a bank manager and fill out a form. This opaque process can take anywhere up to 15-20 weeks, and that’s just to receive a yes or no answer.
This process that might have worked well 25 years ago is completely at odds with the rapid technological evolution we enjoy today. The internet has transformed our economy and everyday lives: over nine out of ten flights are now booked online; digital music, almost unknown a decade ago, already makes up 40 per cent of total sales; Amazon last year recorded £4 billion of sales in the UK; and a whole host of new entrants are revolutionising standards of service and holding down costs for customers.
If you run a business, however, you cannot complete an application form online for a bank loan.
No country has embraced the economic benefits of the internet more enthusiastically than the UK. It now makes up eight per cent of GDP – nearly double the level than, for example, in the United States. So it should be no surprise that a financial lending system that has failed to grasp hold of a faster, more effective process is now facing competition from a wide range of new non-bank models.
Peer-to-peer lending is now a £500 million industry. It took nearly ten years to reach this figure but such is the rate of expansion that it will be doubled within the next two. Funding Circle, which puts people with money to lend directly in touch with successful small businesses who want finance, has arranged loans worth over £100 million in our first three years. New lending, too, is now running at a rate of £10 million every month.
At present, borrowing through Funding Circle is growing by approximately 300 per cent annually. In the last few months we have increased our maximum loan size up to £1 million and introduced new loan terms so businesses can now borrow funds for between six months and five years. This has enabled us to help even more British businesses looking to grow.
This rapid growth has been achieved because we’ve listened to businesses and their advisers and understood the daily challenges they face, while key brokers have told us what their clients most value. This is what a modern financial services industry should be about: putting the customer at the heart of operations and ensuring provision of a valued product.
As a result everything becomes faster and much easier. The internet means we are open for business 24/7 not nine to five. One in two of loan applications to Funding Circle are completed outside normal working hours. Twenty four hours for a decision on a loan is the norm for us. Money for successful applicants is paid into a business’s bank account within two weeks.
And we have more plans over the next few months that will enable even more businesses to borrow, whilst making the application process as simple as possible. Shortly you’ll see the introduction of sole trader loans; we’re ramping up our asset finance programme and have already started lending to property investment companies.
These changes are proving popular as well. A recent, independent report from NESTA found that three out of four UK small businesses who have used peer-to-peer lending would return to the sector first for future loans. Only 27 per cent would go back to their bank even if they offered the same terms. Additionally, the report suggested that the annual market for peer-to-peer business lending could grow as large as £12 billion. Other experts believe it could be even bigger.
Peer-to-peer lending to businesses in the UK still has significantly more to do. It has, after all, taken centuries for the high street banks to build their dominance, but the internet is speeding up history. As Andy Haldane, the Bank of England’s Director, pointed out when predicting that our sector could be the future of high street banking, it was not that long ago that Google and Amazon were only small players.
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