Under a new scheme, the British Business Bank will guarantee the SME loans of one challenger bank. The decision illustrates the key role of alternative finance in SME lending.

The message behind the move by the Business Secretary is two-fold: SMEs still need help accessing funding and alternative finance is the sector to provide this help. Under the new scheme, the challenger bank will lend to businesses that have been unable to secure finance from mainstream banks.

The performance of this initiative will be closely monitored, not least as the government has made clear it would like traditional lenders to adopt a similar strategy that is based around more widespread use of alternative finance services, such as invoice finance, peer-to-peer lending and crowdfunding.

The pilot scheme is the latest signal from the government that traditional lenders alone cannot generate the spark needed to reinvigorate the SME sector and in turn the economy. In recent months, the government has made a further £50 million in SME funding available through the British Business Bank and £10 million through a peer-to-peer lending service.

While traditional lenders still enjoy the lion’s share of this market, as data from a new Irwin Mitchell survey show, businesses are increasingly seeking an alternative to their services. According to the survey of entrepreneurs, almost a third of those questioned identified crowdfunding as their preferred means of raising finance in the next 12 months.

Looking ahead, it is clear that interest in alternative finance will continue to grow.

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