More demand from small firms boosts niche lenders

Growing numbers of small firms are turning to alternative sources of funding as mainstream bank lending continues to dry up, new evidence suggests.

• Figures from the Bank of England showed that business lending fell in July for a fifth month in a row. Pic: Getty

Figures from specialist lenders Co-operative Bank and Aldermore today show that demand for their help is rising, while it has emerged that a team of City heavyweights is looking to launch a bank dedicated to business lending.

The news comes as figures from the Bank of England last week showed that business lending fell for the fifth month in a row in July, piling further pressure on the central bank to boost credit supply.

Yet new entrants to the banking market are beginning to emerge. British Enterprise Bank (BEB), which is expected to start trading early next year, is being developed by a consortium of City financiers aiming to lend exclusively to SMEs using deposits on retail savings products.

The team behind the project, led by former Merrill Lynch banker John Shorrocks, is this week embarking on a two-month 100 million fundraising drive, targeting hedge funds and private equity groups.

BEB plans to operate 23 branches in business parks across the UK, with an online savings operation targeting 60,000 potential deposit holders.

News of the scheme comes a month after City grandees Sir David Walker and Lord Levene raised 50m by launching their NBNK banking acquisition vehicle on Aim.

BEB's backers are said to be in the final stages of securing a banking licence and have put a team in place to run the businesses once finance is secured.

The bank would operate a similar model to business lending specialist Aldermore, which increased its funding to small businesses by more than one-fifth to 302m in the three months to the end of June. The bank's lending is funded by deposits from savers, which rose by 12 per cent to 304m over the same period.

Phillip Monks, chief executive of Aldermore, said: "It is an especially strong performance as we have been careful to ensure that we are lending only to credit-worthy and robust SMEs.

"We have also studiously avoided taking on more in deposits than we can sensibly put to work."

Co-operative Bank has also announced growth in lending to SMEs, with its corporate banking centres in Edinburgh and Glasgow providing more than 31.3m of finance.

The bank's Glasgow centre has increased its lending to businesses to 25.6m, up from 6.9m at the start of 2007. Its operation in the capital has lent 5.7m since opening last year.

David Bell, manager of the Co-op's Edinburgh corporate banking centre, said: "Our presence in the corporate market has benefited from a strong financial position that has supported growth at a time when our competitors were scaling back."

He added that the bank would seek to further strengthen its market share in Scotland.