The beginning of 2014 saw a tale of two halves when it comes to banks lending to small businesses.
On one hand the Public Accounts Committee said efforts to boost loans to business were failing, with net lending having fallen by £2.3 billion since June 2012 under the Government’s funding for Lending Scheme. That’s the one where the banks can borrow money cheaply, as long as they lend it to businesses and individuals.
A few days later, the British Banking Association came out fighting and said banks were more willing to lend than businesses think. It said around two thirds of loans were approved while just over one third of businesses applying for finance thought their bank would approve it.
Another survey of micro-businesses employing less than 10 people (which make up the majority of the Westcountry business community by far), found that more than half thought approaching their bank for a loan was a waste of time. And one in five admitting to turning to payday lenders – despite eye watering interest rates in the main – to fund business growth.
Little wonder therefore that the British Banking Association has launched a year-long marketing campaign to persuade businesses that they are open for business.
But the banks will have a fight on their hands because in the wake of the financial crisis, which has seen customer trust eroded while banks continue to deal with toxic assets, mis-selling scandals and repairing their balance sheets, small businesses have been unable to get credit and are turning to alternative funding streams to meet their needs.
Crowd funding is one such option. This allows individual investors to pool their money together, usually via an online portal, and invest in different business ventures in return for a stake in that business, product or other benefit. People can invest as little as £10 in many cases so it is regarded as low-risk, and if enough investors come forward (the ‘crowd’ idea), the business can raise the funds it needs. One of the most successful crowd funding companies, Crowdcube, is based right here in the region in Exeter.
Another way to raise funds is peer-to-peer lending which, as the name suggests, involves everyday people with money to invest lending it to their peers via an intermediary, usually for a rate of return that is certainly better than they would get from a bank or building society, especially given the low interest rates we have seen in recent years.
For borrowers the rates are competitive because peer-to-peer networks dispense with the traditional and expensive banking infrastructure and administration.
One measure of the growth in both crowd funding and peer-to-peer lending is the fact that from April the industry will become regulated by the Financial Conduct Authority in a move that is designed to inform and protect consumers, while ensuring continued access to these innovative sources of funding.
In fact the peer-to-peer lending market, which is currently worth around £400 million in the UK, is projected to hit £1 billion this year. Some have suggested, including Bank of England director Andrew Haldane no less, that it could in time replace high street banks.
And the demand is certainly there. Our business, Folk2Folk, was launched a year ago having been set up by the owners of long-established solicitors, Parnalls of Launceston. With Parnalls having been active in private mortgages since the 1930s the roots of Folk2Folk are in local lending and borrowing, predominantly in rural communities in Cornwall and Devon.
But what has surprised even us is the astonishing level of demand. In our first year we have seen £22 million loaned by local lenders to local borrowers to fund a wide range of ventures including property acquisitions and conversions, renewable energy, leisure and agriculture projects. And that’s all in the local market in Cornwall and Devon.
Our role is to put those with funds in touch with those looking for funds from a minimum of £25,000 up to £1 million, with interest-only loan terms ranging from three months to five years. Lenders have the comfort of knowing that all borrowing is secured on property, while borrowers know they will get a quick decision – usually seven to 10 days from application to release of funds.
What we have found is that lenders, apart from getting a good return on their investment, value the fact they are supporting ventures and projects in their own communities right here in the Westcountry, and that their money is being put to good use locally. For borrowers the investment can be a lifeline for their business or start-up venture that the banks feel unable to support.
At the moment we are seeing investment rates of around £2 million a month, or £100,000 every working day.
And the concept of being able to invest in your community or locality is certainly gathering pace, fuelled perhaps by the notion that big banking is broken, and it’s time for country folk to help ourselves.