This is the first article in a series of three where Folkert Eggink, Managing Director for Funding Circle Netherlands, takes you on a journey of the SME lending space – from the past to the future.
Part 1: Five years back, how SME lending built momentum
Small businesses are the driving force of our global economy and local communities. The past financial crisis evidenced how underserved they have remained. Luckily, the advent of sophisticated data analytics has catalysed the development of direct lending platforms to serve SMEs.
A need for fuel
The banking sector has historically supported the real economy but this came to a standstill during the crisis. The reasons for this retreat from small business lending are now well understood and widely accepted – banks have structural and regulatory constraints that meant there was no longer the appetite for them to serve this important part of the market.
In the US, commercial loans to small businesses declined by $40 million between 2008 and 2010. Europe was no different: tightening of business credit standards by banks increased drastically since 2009. Again, affecting smaller companies applying for a bank loan the most.
Being cut-off from access to much-needed finance, many business owners were forced to postpone growth plans and pause their development. And as traditional lenders were not providing the necessary services small businesses were seeking, new technology-enabled players emerged.
While invoice businesses, merchant cash advances and credit unions accelerated their operations, lending platforms stepped in to successfully address the financing gap.
The advent of online lending platforms
When Funding Circle issued its first loan in the Netherlands in 2015, the overseas alternative lending market was already well underway.
In the US, approximately $6.6 billion of peer-to-peer loans were facilitated in 2015. In the UK, despite the market being only one-fifth of the US, lending was 72% larger on a per capita basis.
This rapid development was driven by low consumer confidence in banks, an increasingly familiarity with managing financial matters online and a supportive regulatory environment. One example of this is the Financial Conduct Authority (FCA) in London, which introduced a bespoke regulatory approach to peer-to-peer platforms.
Whilst the Dutch market remained relatively small in comparison, it was showing that it could become a valued part of the financial landscape over time. This was evidenced by a 2014 market report from the Dutch Financial Market Authorities (AFM) who acknowledged the industry had ‘emerged from its start-up and pioneering phases and will now be entering a phase of growth’, giving it appropriate attention by granting licences and exemptions on the basis of existing legislation and regulation.
Connecting borrowers with investors
Whilst regulation naturally increased as the market grew and matured, the Dutch Government continued to recognise the important role lending platforms play in supporting the funding needs of small and medium-sized enterprises.
This was especially important, given the small number of large banks in the Netherlands who historically dominated the SME segment. There was a need to bring more choice to small businesses.
By combining cutting-edge technology, sophisticated data analytics and dedicated customer service, platforms were able to provide a better service to small businesses in a way that banks could not.
For the first time, investors were able to directly invest in the loans of these businesses, allowing them to grow and expand.
From then to now
More than a decade has passed – and luckily, there are now many more options for small businesses looking for finance.
Where the financial services industry used to be a one-size-fits-all approach to things such as borrowing, insurance and investing, many fintech businesses have changed the status quo. Services have become simpler, cheaper, more personal and within reach of a wider range of customers.
By having greater choice and more tailored services, small businesses can access the finance they need to grow, helping to create more jobs and ultimately drive economic growth.
While businesses have chosen an alternative path to fuel their growth, online platforms are starting to demonstrate their relevance and the important role they can play in the broader financial ecosystem.
Funding Circle celebrates its fifth anniversary in the Netherlands in 2020. Join the celebrations and keep informed here! #FCNL5