2017 market trends in SME lending

Bank of England statistics show that lending to SMEs is very little changed after the first ten months of 2017.

If anything, the owners of smaller businesses are keeping money on deposit while they weigh up their options in the face of economic uncertainty. SMEs actually paid back £200m more than they borrowed in October.

Meanwhile, in the alternative finance sector, business is growing apace, even though there is widespread acceptance that there are more investors around looking for yield than there are quality borrowers willing to take on debt. The overriding impression is that the biggest seem to be getting bigger, faster; Funding Circle has broken through the landmark £3bn level in terms of loan originations since inception and Zopa is forecasting that it expects to follow suit in January 2018. The latter also announced that it had originated loans of £100m in November, a record for a single month.

The third member of the top tier, RateSetter, appears to be falling behind as it recovers from its foray into wholesale loans. The company has announced annual pre-tax losses of £23.3m for 2016-17, of which £15.5m was down to write-offs and the exceptional operating costs of finding itself running an ad agency. Nevertheless, the platform passed £2bn last year and, more importantly, was granted full authorisation by the FCA in October and expects to be racking up £500m of sales for its Innovative Finance ISA in the first year.

With the top three, plus a number of others who are through the FCA barrier, gearing up to hit the public with their IFISAs before the end of the 2016-17 tax year, we'll have our first really accurate indication of the public’s appetite for tax-wrapped P2P loans as an investment. Funding Circle apparently signed up its first IFISA within 15 minutes of the product becoming available. But, then, FC has paid a huge price for acquiring market share – it lost nearly £36m in 2016 in pursuit of its ambitions.

The latest report from Cambridge Centre for Alternative Finance (CCAF) provides a wealth of useful, independent data, albeit only up until the end of 2016. As the figures above demonstrate, a lot has happened during 2017. For a start, the report points out what are perhaps less obvious facts – like, for example, 35 online platforms became inactive in 2016, either through mergers or closure. Also, that P2P business lenders are providing the equivalent of 15% of all new loans to SMEs by UK banks. The inroads being made by Altfi are now serious and one of the report’s principal authors acknowledges that “alternative finance has entered the mainstream and is likely here to stay.” In true Churchillian fashion, he goes on to state that “this report marks just the ‘end of the beginning’ for the UK alternative finance industry.”

Perhaps one of the most telling findings tucked away in the main body of the report is that 44% of existing loan-based investors anticipate that they will utilise an Innovative Finance ISA once they become widely available and that 40% indicated that they would increase their investment portfolio once they can utilise a tax-wrapper product. With the big battalions putting the finishing touches to their IFISA marketing plans before the 2018-19 tax year opens in April, the only possible blot on the landscape remains the forthcoming publication of the FCA’s new rules governing crowdlending/crowdfunding. If the lights remain ‘green’ after that, it will be difficult for the IFA community to boycott the party.