Crowdfunding is becoming a widely favored alternative to raising capital rather than seeking loans from traditional financial institutions. Small businesses are adopting the new way of raising funds, either in the form of donations or investments from multiple individuals. Crowdfunding platforms as small business lenders are responsible for a significant portion of the loans.
Proving the power of crowdfunding, the third biggest lender to UK small businesses isn't a bank or a building society, rather the peer-to-peer lending platform Funding Circle.
In the three months from July to September, RBS lent £290m to SMEs, Lloyds lent £275m, and Funding Circle came third, having lent £91.5m, ahead of Aldermore, Yorkshire Building Society and Shawbrook.
In the third quarter of 2015, £704m was lent to small businesses through the FLS, which has 36 banks and building societies participating, according to Bank of England data. Crowdfunding platforms raised £251m of investment in the same period, according to data from the Peer to Peer Finance Association.
James Meekings, co-founder and UK managing director of Funding Circle, said: “Whilst the Funding for Lending scheme has helped, take up has not driven substantial increases in net lending because it doesn't solve the cumbersome bank lending process. New forms of innovative finance are growing exponentially however, as they offer a fundamentally better all-round experience to small businesses.”
The company has raised around $300m of equity capital so far and has grown between 120% and 170% a year on average since it was founded, according to Forbes.