A new finance model is emerging from the crowd

The last 12 months have seen a resurgence of confidence from small to medium-sized enterprises (SMEs) who are looking to borrow money again.

Ian Cunningham, head of credit at LendingCrowd. Picture: Neil Hanna

While the “big four” banks still provide the vast majority of the lending to the SME segment in the UK, there are new disruptive players entering the market who are starting to change the lending landscape.

This is important because while SMEs are the backbone of Scotland’s economy and the increasing globalisation of our leading companies requires the necessary funding to help reach new markets, there still exists a significant level of corporate frustration when it comes to traditional lending channels.

At the British Bankers’ Association’s “SME & Commercial Banking: 2020 & Beyond” conference in London last week, there was an interesting mix of established banking players and more recent entrants, including peer-to-business lenders – frequently termed “crowdlenders”.

There was a good deal of discourse around “fintech” and whether or not the Small Business Act and credit data sharing rules will make a difference to the current backdrop. Having been a long-serving head of the credit operation at RBS and now running a similar department at LendingCrowd, it was fascinating to hear and take part in some very lively discussions on how the sector is likely to shape up over the next few years.

What is clear is that there is a new finance model emerging from the traditional banking system. The UK alternative finance sector totalled over £3 billion in 2015, up over 80 per cent year-on-year. At the beginning of June, the Scottish Crowdfunding Report is released – a report that is likely to show that while our own industry has made significant progress in recent times, we have the ability to really step up our game and compete on a UK-wide and international basis to a much greater extent. The evidence shows we’re on the right track as last November we completed one of the biggest peer-to-business funding deals ever recorded in the UK when Diet Chef raised £1.5 million to help fund its next phase of growth.

The market is increasingly telling us that high street banks are not always delivering for high growth firms or SMEs with specific funding needs. This provides us with a big opportunity, with a nimble and flexible approach allowing us to assess deals on a case-by-case basis and much faster. In order to maximise their potential and grasp the emerging opportunities in the lending market, alternative platforms need to embrace the basic tenets of good lending practice to establish their credibility; not only from the borrowers’ perspective but particularly the investors so they have the confidence that the deal they are backing has been the subject of a rigorous and effective underwriting process.

While it is too early to talk about fintech replacing the traditional banking system, a more realistic scenario is the co-existence of alternative financing alongside the status quo – and there is a big opportunity here for Scotland to be at the forefront of developments.

This cannot be anything other than a good thing for Scotland plc, the ambitions of our most exciting companies and the Scottish economy in general.

• Ian Cunningham is head of credit at LendingCrowd and a former head of corporate and commercial credit at Royal Bank of Scotland