For many years, small U.S.-based businesses have had options for obtaining financing. In the UK, small businesses have long been beholden to loans bank provided. Only recently have they had access to alternative credit sources, spurred by restricted conventional lending in the aftermath of the financial crisis.
These non-traditional sources include peer-to-peer lending and payday loans.
According to statistics from the Federation of Small Businesses, 15,000 U.S. financial institutions, split between banks and credit unions, offer commercial financing. In the UK, a mere five lenders represent over 90 percent of loans issued to small and medium-sized businesses.
Said FSB policy head Graeme Fisher, “Alternatives to the banks do not have a great profile in the market.” Slowly but surely, this seems to be changing.
To give the stagnating economy a boost, the British government is supporting non-bank lending. As a result, business owners are turning their attention toward asset leasing, invoice finance, community finance institutions, peer-to-peer lending, and payday loans.
As one of the newest concepts in UK lending, peer-to-peer lending involves people lending to each other as well as to small businesses. Lenders receive better returns than they would with a deposit account at a bank and borrowers find the credit easier to obtain.
The peer-to-peer lending sector is still very small, representing only between £100 and £200 million annually. It also is not without its drawbacks, as there is a high level of risk involved for lenders and not all prospective borrowers qualify. Aside from this financing, small and medium enterprises (SMEs) in the UK have limited options because the other forms of nontraditional credit are not easy to find, though many hope this will change.
One type of business credit that has become more popular in recent years is payday lending. Providers of short-term, no credit check loans are busy providing financing to SMEs that do not qualify for loans bank provided. They offer loans lasting up to four weeks, designed to help a borrower cover expenses until the next paycheck.
Business owners are using this financing to cover the time gap between invoice issuance and receipt of payment. UK regulators have their eye on this market sector because loans APR are high enough for some business owners to land themselves in debt.
In the U.S., these no credit check loans became very popular very quickly. According to recent research conducted by an American bank deposit regulator, one-quarter of American households either do not have access to traditional banking services or prefer this short-term financing due to its relaxed qualification criteria.
UK residents are enjoying the same experience but with increased scrutiny from the Office of Fair Trading, this trend may be short-lived.
While businesses may not find payday loans cheapest of all options, they may find them the easiest to get. Money is provided quickly and as long as the balance is repaid as agreed, the interest component is not too high. However, SMEs must be careful not to overextend themselves or they may be unable to repay the credit extended to them.