Crowdfunding, the financing of projects by multiple lenders via the internet, experienced record breaking customer numbers and lending in Britain last month helped by a series of public relations disastersfor major U.K. banks.
Funding Circle, a U.K. based social lender, say their investors lent 4.3 million pounds ($6.7 million) to small U.K. businesses in July, a 291 percent rise from the same time last year.
New user registrations also increased nearly 50 percent from June, and the firm said to be growing at approximately 260 percent year-on-year.
“Until the launch of Funding Circle in August 2010, small business lending was dominated by the major high street banks. We’re challenging that dominance and providing a service,” James Meekings, co-founder of the firm told CNBC. “There’s no reason why, in the future, Funding Circle cannot represent a significant proportion of the market.”
Meekings says the firm is committed to building a lasting legacy to banks and provide choice for borrowers.
“Banks will always exist in some form, but what we’re seeing is that businesses and people are prepared to have a different relationship with their bank – one which isn’t based on exclusivity.”
Zopa are another alternative funding site that have seen their biggest gains in the last month. 1,621 loans were completed in July, a 16 percent increase from June and up 72 percent from last July.
The firm says customers have flocked to the site after becoming disgruntled with more traditional funding methods.
The Bank of England’s executive director for financial stability, Andy Haldane, has also been keen to back this growing industry.
“Commercial peer-to-peer lending, using the web as a conduit, is an emerging business,” he said in speech back in March.
“With open access to borrower information, held centrally and virtually, there is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in time become the surplus links in the chain,” Haldane said.
Shaa Wasmund, CEO of Smarta (a support platform for business owners) is equally optimistic about social lending, but doesn’t think banks should see crowdfunding as competition.
“I’m more interested in how we can all collaborate. How do we work together to make it easier for small businesses to apply for funding?” she told CNBC.
Wasmund believes that instead of making people go through paperwork to apply for grants, the UK government should match the funds that have been generated with crowdfunding.
Social lending companies have continued to grow at a rapid pace and the industry doesn’t see the same regulation that banks do.
There’s also no need for them to rent buildings for branches, making it possible to provide funds at a cheaper cost. Zopa claims borrowers can access loans at rates typically 20 percent lower than major U.K. banks.
Data showing loans to small and medium sized businesses have contracted over the last four years prompted the Bank of England recently to take new measures to help boost funding. The newly released Funding for Lending initiativewill give cash to big banks with the understanding that they will use it give cheap loans to small businesses.
Natwest’s small business chairman Peter Ibbetson told CNBC he sees innovation in big businesses lending to smaller business via peer-to-peer lending.
“Crowd funding provides choice which is good for businesses,” he told CNBC. “Many value the day-to-day relationship and advice they get from their bank as well as ability to access a range of funding options in one place. Others will prefer a more transactional approach online.”
Ibbetson pointed out that RBS and Natwest have recently slashed interest rates and abolished arrangements fees.
“We can offer loans to small businesses at less than 3 percent, which is the cheapest I've seen lending in nearly 40 years of banking."