Cutting out the banks

Published in Economia

Peer-to-peer lending is in its infancy but it has the potential to radically transform the funding landscape for SMEs. Sally Percy reports

To paraphrase Plato, “Necessity is the mother of invention.” The Greek author and philosopher made the observation in The Republic more than 2,300 years ago as he contemplated the concept of statehood in his iconic work, not the funding problems that plague 21st century SMEs following the meltdown in the global banking sector. Nevertheless, his words help to explain the evolution of the peer-to-peer (P2P) lending industry over the past seven years.

Along with other innovative business models, P2P lending [see explanation, below] owes its origins to the internet. The world’s first consumer P2P lending website, Zopa, launched in the UK in 2005 by the team that helped found internet bank Egg. But P2P lending to businesses has accelerated as a result of the global financial crisis and its repercussions for banks. Under pressure to boost their capital ratios, banks have cut funding to SMEs, which they tend to view as relatively high-risk.

According to the Breedon Report, published in March, there will be a funding gap of an estimated £26bn to £59bn for SMEs during the next five years.

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