Money Insider: Peer-to-peer lenders come into their own as marketplace lending evolves

P2P lenders have bold ambitions, not just to be part of the system but to shape the way that finance is provided, says Andrew Hagger

The peer to peer (P2P) market is rapidly gaining traction in the UK, with alternative lenders now considered a credible and vital alternative to high street banks when it comes to providing business finance.

Funding Circle, Assetz Capital, Thincats and Rebuilding Society are just a few of the new breed of P2P providers offering flexible, affordable lending facilities to the SME market. Recent estimates claim this sector could be a trillion dollar industry within the next decade, cutting out the middle man while helping investors who are keen to support viable new initiatives.

There is evidence that marketplace lending is becoming more mainstream with the Government announcing the mandatory referral of small businesses from banks to alternative finance providers, where the former are not in a position to lend.

It is estimated that this referral arrangement could help a further quarter of a million small firms secure the finance they need.

P2P lenders have bold ambitions, not just to be part of the system but to shape the way that finance is provided.

One of the obstacles faced by P2P players up until now has been a lack of awareness, which remains fairly low among the small business community. Business owners are for the first time faced with a choice when they look for finance, and they should be made aware of alternative funding options each and every time a traditional lender is not in a position to or willing to help.

A high profile example of "new lender/old lender" finance collaboration was the recent tie up with RBS referring SME borrowers to both Funding Circle and Assetz Capital.

Funding Circle has a solid track record with small business lending, so it makes sense for it to partner with a high-street lender and help small businesses that otherwise would have been unaware that P2P finance was an option. If successful, this collaboration could become a blueprint for further partnerships between P2P providers and mainstream banks.

With small business lending failing to meet demand, even at a time when most other areas of the economy are on the up, the emergence of key P2P partnerships will be a shot in the arm for small businesses who continue to struggle for finance.

The scale of the problem is highlighted by recent figures which reveal that just one out of every eight pounds of lending goes to businesses.

Funding Circle, a key player, has already lent more than £537m to around 7,000 businesses, with £100m advanced in the last quarter of 2014 alone.

This level of business loan provision is likely to accelerate; this week it announced that Victory Park Capital, an asset management firm based in the US and an active lender to UK and European companies, will finance up to $420m (£271m) in loans to small businesses originated through Funding Circle both in the UK and US over the next three years.

Hopefully if this level of support continues to grow as anticipated we'll see fewer businesses failing due to lack of bank support, and a positive knock-on effect on the wider economy.

This new marketplace is evolving, and although the tie-up with banks is a huge milestone, I think there's an even bigger, more exciting growth opportunity on the horizon as the Government makes it possible to invest in P2P tax-free, via Isas.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk