P2P Business Lenders Notch Record Quarter as FLS Growth Slows

The Funding for Lending Scheme (FLS) numbers are in for Q4 2015.

Though net flows to small businesses under the government-backed scheme were positive, lending growth slowed in Q4. £0.6bn was lent to SMEs under FLS participants in Q4, versus £0.8bn in the previous quarter (according to the Bank of England – we in fact tracked £675m at the time). In spite of the slowed growth, the Q4 numbers round out a strong 2015 for the scheme. FLS participants accounted for positive SME lending flows of £2.365bn on the year. The 2014 quarterly average, by contrast, was -£0.4bn.

A new participant signed up to the scheme in Q4, bringing the total number of member banks and building societies involved to 37. Furthermore, the Bank of England and HM Treasury announced a two year extension to the FLS in late November last year, in order to afford its participants additional flexibility to draw upon unused drawing allowances earned for positive net lending over the past three years. The Bank of England has advised that existing participants will not generate additional allowances from lending beyond the end of 2015 – making today’s the Q4 data the last publication of its kind. The scheme will be gradually phased out over the next two years.

As that phasing out process takes hold, the alternative finance space will continue to grow. We’ve been tracking the FLS for some time, with a particular interest in comparing the impact of its participants’ SME lending activities with the contributions of the many peer-to-peer business lenders. Note, however, that we only pit peer-to-peer lenders against FLS participants in these analyses. We do not capture the data of direct lenders – like Liberis and Just Cash Flow, nor do we capture Zopa and RateSetter’s SME lending figures (and commercial lending now accounts for a substantial part of the latter’s offering). In short, the credit environment for UK SMEs is unquestionably rosier that the picture that our analysis portrays. But the analysis nonetheless provides an interesting read on UK credit conditions, and indeed of the role of alternative finance providers in creating those conditions.

Peer-to-peer business lending volumes continued to grow in Q4 2015, as indeed they have throughout 2015. A record £446m was lent to UK SMEs via P2P platforms in Q4 – besting the previous watermark by £24m (see chart below, courtesy of AltFi Data). 

Since we began to track FLS numbers in relation to P2P volumes in Q1 2014, net lending flows to SMEs under the FLS stands at £491m; a rough 2014, followed by a much stronger 2015. The UK’s peer-to-peer business lenders have – over that same stretch of period of time – accounted for £2.094bn of small business lending.

In the early days of our FLS coverage, the narrative was of alternative lenders plugging up the funding gap that had been created by FLS fall-offs. The story is now about the coalescing of a firing-on-all-cylinders FLS and the rapidly expanding peer-to-peer business lending sector. All told, encouraging signs for UK SMEs.