By Claire West, Fresh Business Thinking

The pressures on small businesses during and since the recession have been well documented. As banks have become increasingly reluctant to lend to businesses in need of funds, SME cash flow has suffered and the economy as a whole has stalled. In response to the funding challenges facing small businesses, the Government has launched several initiatives to try and counter these issues and encourage money to flow more easily between banks and SMEs.

Reaction to these schemes has been mixed. The latest BoE figures have shown that net lending to SMEs fell by £700m in August, suggesting that initiatives like the Merlin Project and Funding for Lending Scheme are not doing enough to encourage banks to lend to small businesses.

As funding from banks has dried up, SME cash flows are being squeezed in other areas. The recent announcement by Marks and Spencer that it is extending its supplier payment terms from 60 to 75 days is demonstrable evidence of the challenges facing suppliers. Longer payment terms are now common in supply chain relationships, leaving suppliers in a difficult position in terms of available cash.

The combination of a difficult lending environment and supply chain pressures, has lead SMEs to seek alternative sources of funding. In particular, P2P (peer-to-peer) lending in its various forms — from lending through the likes of Funding Circle or Assetz Capital, to invoice finance with Platform Black or Crossflow Payments - has seen real traction amongst small businesses looking for tangible alternatives to loans from high street banks.

P2P lending offers businesses the opportunity to secure investment from sources outside of the traditional banking system, be they high net worth individuals, hedge funds or pension funds. Business models vary from straightforward loan sites which offer investors high returns, equity or rewards, to systems which directly influence business supply chains by providing invoice financing services.

“P2P lending to SMEs is the logical solution to the SME funding crisis”, explains Stuart Law, founder and CEO of Assetz Capital, which has lent more than £5m to UK SMEs and property developers since it was launched earlier this year. “There are millions of businesses out there who are frustrated because their bank can’t or won’t extend them the credit they so badly need to grow. Meanwhile, investors have many billions of pounds earning next to no interest, and would gladly lend to creditworthy SMEs. By putting the two groups together, we’ve been able to get reliable funding for businesses and fair returns for investors — a great result all round.”

Chris Clark, whose pleasure cruise business Kris Cruisers borrowed £50,000 through Assetz Capital, commented: “We’ve been trading for 47 years and had what I thought was a great relationship with our bank — we’ve never missed a payment. However, when we needed to refurbish some boats on our fleet, our bank abandoned us. We had no explanation from them; they just didn’t want to know. So we tried peer-to-peer lending for the first time. Assetz Capital were able to step in and provide us with a loan of £50,000 on good terms — it will really help us to get the boats in great shape for the next season.”

Invoice financing is proving to be valuable to SMEs that are looking to ease cash flows. In response to lengthening payment terms on the buyer side, invoice financing systems overcome this by giving suppliers access to funds put up against invoices which have been raised but not paid. To further expand the alternatives on offer to SMEs looking for finance, P2P lending has been introduced into an invoice financing system for the first time, through Crossflow Payments, a supply chain finance provider.

Tony Duggan, CEO of Crossflow Payments commented: “It is clear that SMEs need to look further than high street banks for viable sources of finance. Invoice financing systems are a great way for suppliers to negate the issues of long payment terms and get access to instant cash. At Crossflow Payments we have gone one step further in developing this system by introducing corporate P2P lending into the infrastructure. We believe it makes complete sense to create an ecosystem in which suppliers, buyers and finance providers all benefit.”

Small businesses can feel encouraged by the fact that there is clearly a range of viable funding alternatives out there when banks are unable to meet their needs. P2P lending continues to make inroads into the SME ecosystem, be it through loans or invoice financing, giving a much-needed boost to small businesses which are looking to grow.

Thousands of businesses are already benefiting from P2P, many millions will be in the coming years.