Calls are growing for the government to step in and support the UK’s alternative lending sector through the COVID-19 crisis.
Alternative lending — which ranges from peer-to-peer platforms to car finance companies — faces a cash crunch after funding markets seized up due to the coronavirus pandemic.
“There's this big non-bank sector that is very keen to lend but it is having trouble accessing the capital markets it needs in order to do that,” Stephen Jones, the chief executive of industry group UK Finance, told MPs this week.
“This non-bank issue is a really important one,” Jones told the Treasury Select Committee.
Banks and other mainstream institutions have become reluctant to extend credit to other lending businesses given the current economic uncertainty, creating cashflow problems for many businesses.
“We need this money for operating capital, payroll, rent, because the majority of our customers can’t pay us right now,” David Goldin, the chief executive of online business lender Capify, told Yahoo Finance UK. “The lenders are at risk because we can’t get liquidity.”
The problem has been made worse by new rules from the UK’s Financial Conduct Authority (FCA) requiring all lenders to give people and businesses repayment holidays during the current economic shutdown.
“The government’s saying we should show some payment leniency on our SME customers,” Goldin said. “Well, we’re all SMEs ourselves? How are we supposed to show leniency when no one is giving us liquidity to operate and get through the storm ourselves?”
The industry is also struggling to access the UK government’s flagship support scheme designed to help companies through the crisis.
“The alternative lenders that went to apply for the coronavirus business interruption loan — we don’t even get to step two,” Goldin said. “Step one is: oh, our bank policy is we don’t normally lend to lenders. Well, this isn’t normal times.”
The government has set up a scheme run by the Bank of England to keep money flowing to banks and building societies but many smaller lenders have been shut out.
Goldin said the alternative finance industry had been “hung out to dry” and was at risk of being “decimated” without government support.
Natalie Ceeney, chair of fintech industry group Innovate Finance, told Yahoo Finance UK she was seeing similar problems across the industry.
“We risk seeing really good, very viable companies go down just because they were unlucky about the timing of their funding cycle,” she said.
Innovate Finance, UK Finance, and other industry finance groups wrote a letter to the Treasury last week asking for help from the government.
The groups have asked the government to set up a new ‘forbearance liquidity funding scheme’ that would allow alternative lenders to borrow cash relative to the volume of payment holidays offered. The industry is also lobbying for banks to be given state-guarantees in order to free up credit lines. Finally, the groups want to see government purchases of bonds to allow non-banks to keep issuing notes while securitisation markets are closed.
“We don’t want good, viable businesses with good business models to be struck down by COVID-19,” Ceeney said.
Around a third of UK small and medium sized businesses rely on alternative financing of some sort, according to Innovate Finance.
“These are lenders that we actually need,” Ceeney said. “We found out in 2008 that the banks weren’t very good at supporting quite a large segment of the population. We’re going to need this sector to be vibrant after the event.”
Goldin said: “Once the dust settles here, we all know the banks aren’t going to lend to these SMEs. They’re not lending now they’re certainly not going to lend then.”
He added that Capify had seen “unprecedented demand” from businesses looking to borrow in recent weeks.
“The industry is going to have this tremendous opportunity going forward,” Goldin said. “It’s just a question of how do you survive the storm now.”
Ceeney said Innovate Finance “continue[s] to have productive talks” with the Treasury about possible support for alternative lenders.
A spokesperson for the Treasury said: “We’ve taken action at unprecedented speed to help businesses, jobs and our economy during this crisis – with hundreds of thousands of firms across the county benefitting from our wide package of support.
“We’re working closely with banks and industry bodies to ensure we get this support out to those who need it as soon as possible.”