The decision by Santander to launch a £40 million SME investment fund, and the format of this funding, has again underlined the importance of alternative finance in the UK.

The Santander fund is being offered in partnership with venture capital firm Enterprise Ventures and the Greater Manchester Pension Fund – the alternative finance component of this fund signals a growing trend in small business finance away from traditional lending sources. All types of SMEs can apply for funding as long as they have been trading for three years or more and have turnover and operating profit of least £1 million and £100,000 respectively.

This development in SME lending, which is part of a wider sea change in finance thinking, comes as the Bank of England announced yet another dip in SME bank lending at the end of June; down 0.7% over a 12-month period. This drop is a telling indictment of the relationship between traditional lenders and small businesses. While the unveiling of multi-million pound SME funds by the likes of HSBC and Lloyds has seen some shift away from the long-standing position of cautiousness, small businesses remain wary of the practices and attitudes of these institutions.

Further underlining the growing appetite for alternative finance is news that a record number of small businesses have applied for Enterprise Investment Scheme (EIS) finance.  According to HMRC, the number of applications for EIS finance for the year to June 2015 rose 7% compared with the figure for the previous 12-month period. The growth has been widely attributed to the paucity of SME lending options available from traditional sources.

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