RateSetter is one of the country’s leading peer-to-peer lending platforms. Since launching in 2010, the platform has been used by major fund managers, the likes of Woodford Investment Management and Artemis; it was the first globally to launch a Provision Fund to help protect its investors; and the company has gone on to launch in Australia in 2014.
At our last event – Crowdfinders Live: The Science of Crowdfunding – we were fortunate to have Peter Behrens, Co-founder and CCO of RateSetter, as a guest on our morning panel session. Now, Peter has written a brand new guest blog for our View from the Shapers, Changers & Money Makers series, to offer his perspective on how we can ramp up funding for SMEs.
Plenty has been written about the difficulties experienced by small and medium enterprises (SMEs) looking to raise finance in recent years.
In the simplest terms, banks drastically reduced the amount they lent to SMEs following the financial crisis. Despite significant political and public pressure, bank lending to SMEs fell month after month, year after year, and has never fully recovered. SMEs suffered as a result: without access to funding, SMEs find it hard to prosper and grow.
With noble intentions, the Government stepped in: in 2012 it launched the Funding for Lending Scheme (FLS), which essentially promised banks access to cheap money to lend to SMEs.
So what happened? Despite the incentive, bank lending to SMEs didn’t increase – it actually continued to fall. While in recent months it has finally returned to growth, it remains well below pre-financial crisis levels.
This environment provided the catalyst for two types of market-based finance to step in and start filling the gap: equity crowdfunders, which match early stage companies with equity investors; and peer-to-peer or marketplace lending platforms, which match more established, growing businesses with loans from investors.
They provide businesses with a new way to access the finance they so badly need, and are starting to have a material impact. Despite competing against FLS money, in the last 18 months alone, my peer-to-peer platform, RateSetter, has lent more than £250 million to creditworthy UK businesses, and we are now significantly scaling up our business finance capability.
American writer and philosopher Thoreau once said “that government is best which governs least”. Was the FLS perhaps a case of the Government intervening unnecessarily, and do we still need it?
At the time it was introduced – as an emergency measure to boost lending to small businesses – the FLS arguably made sense. But several years later, with a stronger economy providing an environment that has led to over 700,000 more companies being established in the last three years, in my opinion, the case has become much weaker. And at the same time, market-based finance solutions have increased their reach. But the longer the FLS operates, the greater the risk that non-participants who lend at commercial rates, will be crowded out.
So it’s time for the Government to recalibrate and phase out the FLS. As government funding withdraws, more innovative market-based approaches can scale up. More forward-thinking parts of government are already boosting finance for SMEs without distorting the financial market – the British Business Bank is lending £10 million to small businesses through RateSetter at the same commercial rates as our 40,000 other investors. This strikes me as a more targeted, sustainable approach.
When it comes to SME finance, the era of big, expensive government schemes is coming to an end – it’s time to be more forward-thinking and allow the market back in.
Find out more about RateSetter, here: https://www.ratesetter.com/