Business groups endorse non-bank finance for small firms

The Government should be doing more to promote the alternative forms of finance available to smaller firms, says the Federation of Small Businesses (FSB).

According to the FSB's new report Alt + Finance, a more 'imaginative' solution to finance needs to be embraced, such as peer to peer lending, to support small firms and aid UK economic recovery and growth.

The FSB also accused UK banks of sticking to a weakened lending model, criticising financial institutions for having a lack of 'transparency and diversity' as well as 'limited local focus' and over-controlled lending decisions.

Alternatively, the report suggests that the UK has much to learn from overseas models of lending, in particular German and US banks, whose lending practices the FSB called 'varied, local, longer-term and reliable.'

The report highlights concerns that small businesses are still struggling to gain access to adequate capital. Both Project Merlin's failings to lend more to small and medium sized enterprises (SMEs) at the beginning of the year, and research which found more owners funding businesses from their own savings, echo the FSB report which claims that there is 'no short term solution to increasing bank lending.'

Accusing the current bank lending system of 'failing', John Walker, national chairman of the FSB said: "We need to accept that in its current form, our banking structure might never fully cater to the needs of the UK's business community. We need to build alternative routes that connect savers and investors with viable small businesses eager to grow, and thereby introduce innovation and competition to the sector."

The FSB has called for various alternatives to bank finance, such as peer to peer lending and the introduction of a US model of Government backed Community Development Finance Institutions to encourage local lending.

Walker continued: "We challenge the Government to look for short term wins, such as helping existing peer-to-peer lenders scale up their operations, as well as thinking strategically about the longer term and the kind of financial infrastructure we need to underpin our economy and support small firms to grow."