THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle

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THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
THE BIG
BUSINESS
OF SMALL
BUSINESS
APRIL 2019
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
Tom Morris, co-founder of the Bobbin bicycle company.
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
The Big Business of Small Business

TABLE OF CONTENTS
                                Foreword5

                                Executive summary6

                                1. Introduction12

                                2. United Kingdom16
                                     2.1 Small businesses’ access to finance                     16
                                     2.2 Funding Circle’s UK lending profile                     20
                                     2.3 What is Funding Circle’s full economic impact in the UK? 23
                                     2.4 Why do small businesses use Funding Circle?             25

                                3. United States30
                                     3.1 Small businesses’ access to finance                     30
                                     3.2 Funding Circle’s US lending profile                     34
                                     3.3 What is Funding Circle’s full economic impact in the US? 37
                                     3.4 Why do small businesses use Funding Circle?             38

                                4. Germany44
                                     4.1 Small businesses’ access to finance                     44
                                     4.2 Funding Circle’s German lending profile                 48
                                     4.3 What is Funding Circle’s full economic impact
                                         in Germany?                                             50
                                     4.4 Why do small businesses use Funding Circle?              51

                                5. The Netherlands56
                                     5.1 Small businesses’ access to finance                     56
                                     5.2 Funding Circle’s Netherlands lending profile            59
                                     5.3 What is Funding Circle’s full economic impact
                                         in the Netherlands?                                     61
                                     5.4 Why do small businesses use Funding Circle?             62

                                6. Conclusion68

                                Appendix 170

APRIL 2019                                                                                         3
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
Kate Lester, owner of a
California-based luxury
interior design firm.
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
The Big Business of Small Business

FOREWORD
Small businesses mean big business. They keep                            When we give small businesses the power to
our high streets bustling, connect us with our                           go further, the economic output is enormous.
local communities, and power the economy on                              Within this report, it’s incredibly humbling
an incredible scale. Our business was founded                            to see the significant contribution that small
to give them a better deal, and they remain at                           businesses have on the global economy as
the heart of what we do every day.                                       a result of accessing finance through our
                                                                         platform. In 2018 alone, these businesses
An astonishing 99 percent of all firms are small                         unlocked 115,000 jobs and contributed £6.5
businesses,1 and they play a vital role in society                       billion to GDP across our four markets, with the
by driving economic growth, employment                                   benefits reaching all corners of each country.
and innovation. Despite this, they are often
overlooked and underserved, with around                                  From local cafes and quirky gift shops
53 percent saying it’s difficult to access                               to trusted autobody shops and friendly
finance for growth.2 A factor at play here is the                        accountants, small businesses keep our world
lingering effect of the financial crisis some 10                         running. That’s why we’ve put their needs at
years ago, and the impact it has had on the                              the forefront of our mission. We’re in the big
small business lending market.                                           business of small business.

This report reveals that very little has changed
since then. While the number of small
businesses has grown steadily since 2008,
they continue to represent a tiny proportion
of banks’ overall balance sheets. What this
research also points to is a pattern of small
firms being at a disadvantage in terms of the
support they receive from the banks, compared
to larger businesses across our markets. As
a result, a growing number are moving away
from thinking “bank first”.

Part of the story here is the pace at which
technology is transforming and evolving
the financial landscape. This is particularly
noticeable for consumers, with a third now
using some form of FinTech. Small businesses
are beginning to reap the rewards of this digital
shift as well, with tech firms such as Square
and Shopify now offering dedicated services to
meet their needs. When it comes to accessing
finance, online lending platforms offer the 21st-
century approach: a simple online application
powered by innovative technology and
advanced data analytics, accessible no matter                            Samir Desai
where a business is based.                                               CEO and co-founder of Funding Circle

1
    Source: OECD, ‘SMEs and Entrepreneurship’ (http://www.oecd.org/cfe/smes/).
2
    Oxford Economics (2017), ‘SME Strategies for Success’: a global study for American Express.                           5
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
The Big Business of Small Business

    EXECUTIVE SUMMARY
                                                   ACROSS THE WORLD, THE FINANCIAL LANDSCAPE IS
                                                   CHANGING FAST

                                                   Technology is transforming the way consumers access their
                                                   money and choose financial products. It is estimated that a third
                                                   of all digital consumers around the world now use some form of
                                                   financial technology (“FinTech”)—from online banking to apps
                                                   that allow you to take a loan, roll up savings each week, or invest
                                                   in stocks and shares.1

                                                   Small businesses—poorly served by traditional banks for
                                                   decades—are also catching up in their use of FinTech. The
                                                   financial services landscape for these firms has changed
                                                   drastically in the last 10 years, following innovations such
                                                   as the introduction of payment apps for small retailers, and the
                                                   emergence of online lending platforms.

                                                   Such developments are crucial to global economic prospects, given
                                                   that small businesses comprise 99 percent of firms and account for
                                                   more than half of all employment in industrialised countries.

                                                   YET TRADITIONAL BANKS CONTINUE TO HOLD SMALLER
When changes in UK bank                            FIRMS BACK
overdrafts are taken into
account, net lending to SMEs                       Small businesses continue to be relatively unimportant to banks.
was negative in 2018—meaning                       Lending to these customers makes up a very small proportion
UK banks collected more in                         of banks’ overall balance sheets, and this segment of the market
repayments than they gave out                      is generally observed to be the most poorly served. In all four
in new loans and overdrafts.                       countries studied for this report, we see a pattern of small firms
                                                   receiving harsher terms on loans that are granted, relative to
                                                   their larger peers.

                                                   In the UK, the flow of net bank lending to small and medium-
                                                   sized enterprises (SMEs) totalled just £518 million in 2018,
                                                   compared with an annual average of £2 billion over the
                                                   previous three years. When changes in bank overdrafts are
                                                   taken into account, net lending to SMEs was actually negative
                                                   in 2018— meaning the UK banks collected more in repayments
                                                   than they gave out in new loans and overdrafts to SMEs.

    6    1
             E&Y, (2017), ‘E&Y Fintech Adoption Index 2017; The rapid emergence of FinTech’.
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
The Big Business of Small Business

In the US, while bank lending to commercial and industrial
customers is increasing, small businesses are again being left
out. Banks relaxed their approval standards for loans to large
and middle-market firms much more than to small firms in 2018,
and further disadvantaged SMEs in how they changed the terms
and conditions on these loans.

In the Netherlands, Dutch banks have yet to reverse the
deterioration in terms offered to SMEs, relative to larger firms,
that became evident nearly 10 years ago. Moreover, bank
lending to non-financial businesses continued to fall in 2018—
greatly affecting firms applying for smaller loans.

In Germany, the smallest firms face stringent terms and
conditions and high administrative costs imposed by banks.
While small and medium-sized firms have reported an easing of
interest rates over recent years, charges for micro‑businesses
(firms with between one and nine employees) remain
comparatively elevated across all types of funding.

SMALL FIRMS’ DEMAND FOR FINANCE IS GROWING FAST—
AND THEY ARE TURNING TO FINTECH                                       The stagnation in bank lending
                                                                      is in stark contrast to the rapid
The stagnation in bank lending to SMEs is in stark contrast           expansion in SME activity. They
to the continued rapid expansion in SME activity across the           are responsible for 60 percent
four countries featured. The overwhelming majority of firms           of all jobs in industrialised
in industrialised countries are SMEs—and their numbers are            economies, and almost the
growing all the time. In 2018, for example, the total number of       same proportion of GDP.
UK-based SMEs was five percent higher than in 2015.

Together, SMEs are responsible for 60 percent of all jobs in
industrialised economies, and almost the same proportion of
the billions in GDP that these countries generate. An increase
in available finance will therefore have a major impact on all four
economies in this study, helping to fund further job creation,
boosting economic output, and raising significant extra tax
revenues.

Against the backdrop of falling bank lending and a growing
feeling that bank loans are not relevant to them, many SMEs are
showing increased demand for other forms of external finance.
The rapid expansion of online lending platforms is part of this
trend, offering small firms greater choice and flexibility. Across
the four countries, we see that SMEs are increasingly applying
for, and gaining, loans through online platforms, as they move
away from thinking “bank first”.

                                                                                               7
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
The Big Business of Small Business

                                     FUNDING CIRCLE IS FAST BECOMING THE FIRST CHOICE
                                     FOR SMALL BUSINESSES IN ALL OF ITS MARKETS

                                     Lending through Funding Circle has grown rapidly in
                                     2018. Across its four markets—the UK, US, Germany and the
                                     Netherlands—the online lending platform enabled £2.3 billion
                                     in new loans to SMEs last year. The total value of loans under
                                     Funding Circle’s management also grew markedly, reaching
                                     £3.1 billion at the end of 2018—some 55 percent higher than
                                     the previous year. This growth continues to reflect two key
                                     advantages, according to our surveys of Funding Circle clients
                                     in all four countries: both the speed and simplicity of its
                                     application and approval process.

                                     Some 73 percent of customers approached Funding Circle
                                     first for their new loan in 2018, without having previously
                                     applied for a bank loan. In the UK, 84 percent of the surveyed
                                     customers said Funding Circle was their first port-of-call for a
                                     loan, while in Germany the figure was 75 percent. Furthermore,
                                     82 percent of customers surveyed reported that they would
                                     approach Funding Circle first for finance in the future, rather
                                     than a bank.

                                     THE ECONOMIC IMPACT OF LENDING THROUGH

£6.5 bn
                                     FUNDING CIRCLE

                                     In total, Funding Circle’s loans under management at the end
                                     of 2018 supported a £6.5 billion contribution to Gross Domestic
Annual contribution to GDP           Product (GDP) across its four markets. This is a year-on-year
supported by loans                   increase of 56 percent in real terms, and means that in 2018,
through Funding                      every £1 lent through Funding Circle enabled small businesses
Circle across its                    to contribute more than £2 to the economies they operate in, in
four markets in 2018.                terms of additional GDP.

                                     Loans taken through Funding Circle enabled 115,000 jobs in
This is a year-on-year increase of   these four countries—54 percent higher than its loans were
56 percent, in real terms.           estimated to have supported at the end of 2017.

                                     The activity and employment supported by these loans also
                                     raises significant tax revenues for local and central governments.
                                     The total loans under management at December 2018 are
                                     estimated to have generated £2 billion in annual tax receipts
                                     in Funding Circle’s markets, up 39 percent in real terms on the
                                     amount raised in 2017.

       8
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
The Big Business of Small Business

FUNDING CIRCLE’S
ECONOMIC IMPACT
IN 2018

 TOTAL IMPACT                                                           Direct          Indirect        Induced

 GDP CONTRIBUTION                                     EMPLOYMENT                           TAX REVENUES
 £6.5 billion                                         115,000 jobs £2.0 billion
  up 56% from 2017*                                   up 54% from 2017                     up 39% from 2017*
                                      £2.2 bn
     £3.2 bn
                                                                               62,800                           £1.0 bn
                        £1.1 bn
                                                                                                             £0.3 bn
                                                                    18,700

                                                                               33,400              £0.7 bn

                    £4.1 billion                        72,000 jobs                            £1.0 billion
                    $2.8 billion                        38,000 jobs                             $1.1 billion
                  €216 million                            3,200 jobs                           €70 million
                  €140 million                            1,900 jobs                           €47 million
                                                                 Every £1 million lent through Funding Circle

                                         £3.1                                 … contributes   £2 million to GDP
                                         billion

                                                                              … supports   37 jobs
        55%                          Loans under                              … and generates

                                                                              £635,000 in taxes.
  growth in value of                 management
  loans since 2017**                at end of 2018

* Increase in real terms; totals may not sum due to rounding
** Value of all loans under Funding Circle management, end 2018 vs end 2017                                               9
THE BIG BUSINESS OF SMALL BUSINESS - APRIL 2019 - Funding Circle
The Big Business of Small Business

                                          ECONOMIC IMPACT IN THE UNITED KINGDOM

                                   Despite uncertainty as a result of the UK leaving the EU
                                   and fragile economic growth, SME demand for finance has
                                   remained strong. With net lending by banks falling so that
                                   the value of outstanding bank loans held by SMEs was 16
                                   percent lower than in 2011, Funding Circle has more than
                                   doubled net lending to SMEs from £345 million in 2016 to
                                   £723 million in 2018, when the platform’s net lending was
                                   some £200 million more than the entire UK banking system.

                                   The value of loans under Funding Circle management in the
                                   UK has also grown strongly, reaching £2.2 billion at the end
                                   of 2018—up from £1.6 billion a year earlier—and supporting
                                   an annual contribution to UK GDP of £4.1 billion.

                                   This is estimated to have sustained 71,900 jobs and generated
                                   some £1 billion in business and labour taxes in 2018.

115,000
                                          ECONOMIC IMPACT IN THE UNITED STATES

                                   With the US economy growing robustly in 2018, small
                                   and medium-sized firms have had a strong appetite for
Total number of jobs               external finance. On average across the year, 60 percent of
supported by lending               small firms had undertaken capital expenditure within the
through Funding                    prior six months. New lending through Funding Circle has
Circle in 2018.                    expanded to meet this demand, standing 54 percent higher
                                   than its level at the end of 2017.
This is a 54 percent increase on
                                   Small US businesses continue to report difficulty in
the previous year.
                                   accessing credit, with the smallest firms facing the most
                                   severe difficulties. According to the Federal Reserve’s Small
                                   Business Credit Survey, 32 percent of firms with between
                                   one and nine employees reported experiencing challenges
                                   obtaining credit over the previous year. This figure drops to
                                   18 percent for firms with between 50 and 499 employees.

                                   Lending through Funding Circle had a sizeable impact in
                                   the US economy in 2018. We estimate that it supported a
                                   $2.8 billion annual contribution to US GDP, some 38,000
                                   jobs, and $1.1 billion in tax receipts.

        10
The Big Business of Small Business

          ECONOMIC IMPACT IN GERMANY

  The ECB’s SAFE survey suggests that German micro-
  businesses (the “S” in SMEs) feel the onerous application
                                                                      £2.0 bn
                                                                      Annual tax receipts enabled
  procedures and substantial collateral requirements that banks
                                                                      by loans through
  and other lenders require limit their access to external finance.
                                                                      Funding Circle
                                                                      across its four
  In contrast, Funding Circle’s operations in Germany
                                                                      markets in 2018.
  continue to grow rapidly—responding to the needs of
  micro-businesses and other firms seeking loans of between
  €5,000 and €250,000. In all, 1,285 new loans were issued            This is a year-on-year increase of
  through the platform in 2018, over 85 percent more than             39 percent, in real terms.
  the previous year. The total value of these new loans rose
  even faster, by 92 percent.

  Based on the value of loans under its management at the end
  of 2018, Funding Circle is estimated to have sustained a €216
  million annual contribution to German GDP, some 3,200 jobs,
  and €70 million of tax receipts to pay for vital public services.

          ECONOMIC IMPACT IN THE NETHERLANDS

  Against a backdrop of persistent decline in bank lending
  to Dutch SMEs, and banks’ continued extension of inferior
  terms and conditions to SMEs relative to larger companies,
  some 83 percent of Dutch small firms regarded bank loans
  as irrelevant in the ECB’s 2018 H1 survey on enterprises’
  access to finance. This was higher than the EU-wide
  average of 76 percent.

  Small businesses are taking advantage of the greater choice
  of lenders, increasingly applying for credit at non-bank
  sources of finance. In the same survey, 19 percent of Dutch
  SMEs reported an increased demand for online and other
  types of non-bank lending over the previous six months.

  Funding Circle is an increasingly important source of
  finance for these small businesses. We calculate that loans
  under its management at the end of 2018 supported a total
  contribution to the Netherlands’ GDP of €139 million, enabled
  1,900 jobs, and generated €47 million in tax receipts.

                                                                                                 11
The Big Business of Small Business

     1. INTRODUCTION
     The overwhelming majority                   Fig. 1: Loans to SMEs as a share of banks’ total balance sheets,
     of firms in industrialised                  by country
     countries are small and
     medium-sized enterprises                     2.4%
     (SMEs). Together, they are
                                                                     2.1%
     responsible for 60 percent of                 2.1%
     all jobs, and almost the same
     proportion of the billions in GDP
                                                   1.8%
     that these countries generate.2

     Historically, small businesses                1.5%
     have depended on traditional
     banks for access to the                       1.2%
     credit they need to survive
     and flourish. But this has
                                                  0.9%
     served them poorly since the
                                                                                                0.7%
     financial crash. Over the past                                                                                     0.6%
     decade, banks’ willingness                   0.6%
                                                                All loans to
     to lend to small businesses                                firms with a              All commercial          Loans under €1
     has deteriorated markedly,                   0.3%         debit account              and industrial          million to firms
     with clear evidence of major                             turnover below               loans under             with revenue
     disparities between their                                   £25 million                 $1 million          under €50 million
     attitude to lending to larger               0.0%
                                                                     UK                         US               The Netherlands
     businesses, versus what is
     being offered to SMEs.                      Source: Bank of England, US Federal Reserve, FDIC, ECB, De Nederlandsche Bank

                                                 For example, while the value                   Across the world, today’s
Loans to small businesses                        of new bank lending to large                   SMEs are a crucial part of the
are relatively unimportant                       businesses increased by 43                     future economic landscape,
to banks, comprising a very                      percent in the UK between                      with many start-ups and small
small proportion of their total                  2015 and 2018, it decreased                    firms operating in tomorrow’s
balance sheet.                                   to SMEs by three percent                       growth industries. As an
                                                 over the same period. In                       example, six percent of SMEs
                                                 part, this is because loans                    that were larger than sole
                                                 to small businesses are                        traders operated in the digital
                                                 relatively unimportant to                      sector in the UK in 2018.4,5
                                                 banks, comprising a very                       However, because many of
                                                 small proportion of their total                these firms are “asset light”,
                                                 balance sheet (Fig. 1).3                       they are not well catered for
                                                                                                by traditional lending as banks
                                                                                                typically require assets to
                                                                                                secure finance against.

          2
            OECD, (2017), ‘Small, Medium, Strong. Trends in SME Performance and Business Conditions’, 15 May.
          3
            Data on German banks’ stock of outstanding loans to SMEs was unavailable.
     12   4
            ONS, (2015), ‘What defines the digital sector?’, 8 October.
          5
            BEIS, (2018), ‘Business Population Estimates for the UK and regions 2018’, 11 October.
The Big Business of Small Business

This is particularly significant                  The next four chapters of this
in the digital sector, where                      report focus, in turn, on each                        Economic output in the digital
economic output across the                        of Funding Circle’s markets,                          sector is forecast to grow
UK, US, Germany, and the                          starting with the UK. In each                         by 43 percent over the next
Netherlands is forecast to                        case, we begin by investigating                       decade, more than twice the
grow by 43 percent over the                       the economic landscape for                            growth forecast for the four
next decade, in real terms.6                      small businesses in terms of                          countries’ overall GDP.
This is more than twice the                       their access to finance, and
growth forecast for these four                    other issues. We then present
countries’ overall GDP, which                     a profile of the loans extended
is predicted to increase by 19                    through Funding Circle in that
percent in real terms over the                    country, before revealing the
same period (2018 to 2028).                       total economic impact of the
                                                  activity supported by these
The banks’ adverse treatment                      loans, in terms of GDP, jobs,
of SMEs is clearly a concern for                  and taxes.
future prosperity, as it severely
limits small businesses’ pace                     Finally, we present the results
of development. And this is an                    of our latest surveys of
issue from the very start of the                  small businesses that held
application process: the length                   loans under Funding Circle
of time taken to apply for                        management at the end of
credit and receive a decision                     2018—both to understand
from a bank can prove costly                      what motivated them to seek
for SMEs, leading to foregone                     finance, and to gain insight
productivity—an issue                             into their experiences with the
highlighted repeatedly by small                   lending platform.
businesses around the world.
                                                  These businesses were also
As a result, online lending                       surveyed with regard to
has become a key source of                        their revenues, employment,
finance for SMEs, with Funding                    procurement of goods and
Circle establishing itself as                     services, imports, and tax
the leading small business                        payments. This information,
loans platform in all four of                     along with Funding Circle’s
its markets. The benefits of                      loan book data, was used to
lending platforms, according                      the calculate our economic
to small businesses, include                      impact results for each
more focused products, faster                     country.
credit decisions, improved
funding chances, and the lack
of collateral requirements.7

6
    Forecasts are from Oxford Economics’ Global Industry Model.
7
    The Federal Reserve Banks, (2018), ‘Small Business Credit Survey 2017; Report on Employer Firms’, 22 May.                  13
The Big Business of Small Business

CASE STUDY:
BOBBIN BICYCLES
Sian Emmison is the co-founder, with her           Transforming themselves into an online
husband Tom, of the Bobbin bicycle company—        company that deals directly with individual
established almost a decade ago because “we        customers was a huge challenge—and one that
wanted to spread the joy of cycling to people      required significant upfront funding. “The bank
who love life but aren’t bike nerds”. In other     we’d been with for years had been incredibly
words, people just like them.                      unhelpful—they just weren’t interested at
                                                   all, which really surprised me. To them, we
“From the start,” Sian explains, “we were          probably looked too small.”
trying to put the idea in people’s heads that
cycling was a really good way to get around—       In contrast, Sian says, Funding Circle was much
particularly for women. Eighty percent of our      more open to their plans. The first loan was
customers are female, which is very unusual in     secured in December 2016, “in only a couple
the bike trade.”                                   of weeks”—and the bright new Bobbin website
                                                   launched the following June. “Since then our
These brightly coloured bikes gained an            business has really taken off. The growth has
immediate following. Based in East London,         been really steep.”
their cottage business grew steadily through
a UK distributor, who imported the finished        In the first year, however, they still had some
bikes from Asia. Everything appeared to be         very large trade commitments. To achieve the
going swimmingly—yet Sian and Tom knew a           “full pivot” demanded a further loan, and the
dramatic shakeup was needed if the company         couple had no qualms about going back to
was to realise its full potential.                 Funding Circle in early 2018.

Sian describes the 2016 Brexit referendum          “We wanted to move as much business to direct-
as their snapping point. “We said, ‘We’ve          to-consumer as we could,” Sian explains. “We
got to start selling our bikes online, direct to   thought it was a no-brainer at the time, but we’ve
the consumer. We’ve got to bring all of that       actually gone way past our goal. We’d hoped
business in‑house.’”                               to turn over about the same amount but make
                                                   more profit. In fact, we’ve turned over a lot more,
                                                   so things are looking very rosy.”

14
The Big Business of Small Business

                                     15
The Big Business of Small Business

     2. UNITED KINGDOM
     2.1 SMALL BUSINESSES’ ACCESS TO FINANCE

     Small firms have continued                      Fig. 2: New UK bank lending to non-financial businesses of
     to miss out on the recovery                     all sizes
     in UK bank lending to
     businesses. While gross                         £ billion per quarter
     lending by UK banks to the                      80
     non-financial business sector                               SMEs               Large businesses
     has grown significantly—up 30                   70
     percent in 2018 Q4, compared
                                                     60
     to three years earlier8—these
     figures mask considerable
                                                     50
     disparity in the growth of new
     bank lending by customer                        40
     size. This is evidenced by
     Bank of England data which                      30
     shows that, while the value
     of new bank lending to large                    20
     businesses has increased by
     43 percent over this period,                     10
     it has decreased to SMEs by
                                                      0
     three percent (Fig. 2).9
                                                      2011Q2           2012Q4           2014Q2            2015Q4           2017Q2            2018Q4
                                                     Source: Bank of England

                                                     Consequently, the flow of net                      As a result, the value of
While the value of new bank                          bank lending to SMEs (i.e. new                     outstanding bank loans held
lending to large businesses                          lending minus repayments)                          by SMEs—some £166 billion—
increased by 43 percent over                         totalled just £518 million                         was still 16 percent lower at
the past three years, the value                      in 2018, compared with an                          the end of 2018 than in April
to SMEs decreased by three                           average of £2 billion per                          2011. As Fig. 3 shows, from 2011
percent in the same period.                          annum over the previous                            to mid-2015, banks decreased
                                                     three years. When changes                          the volume of lending to
                                                     in bank overdrafts are taken                       firms of all sizes. Since then,
                                                     into account, net lending to                       the loans they issue to large
                                                     SMEs was actually negative                         firms have recovered quite
Taking into account changes                          in 2018, at minus £95 million.                     significantly, while those issued
in bank overdrafts, net lending                      Put simply, this means that                        to SMEs have stagnated.
to UK SMEs was negative in                           the banks collected more
2018. Banks collected more in                        in repayments than they
repayments than they gave out                        gave out in new loans and
in new loans and overdrafts.                         overdrafts to SMEs.

          8
            Source: Bank of England. These figures relate to lending by all ‘monetary financial institutions’, but as the majority is accounted for
          by banks, we refer to ‘bank lending’ for the sake of simplicity. All lending figures are in cash terms, i.e. not adjusted for inflation. The
     16   figures for new gross lending exclude changes in overdraft levels.
          9
            In the banking statistics published by the Bank of England, SMEs are defined as firms with an annual turnover on their main
          business bank account of less than £25 million.
The Big Business of Small Business

Fig. 3: Value of outstanding bank loans to non-financial businesses, by firm size
Indices, April 2011=100
100
                            All businesses            SMEs             Large businesses
 98

 96

 94

 92

90

 88

 86

 84

 82

80
 Apr-11           Apr-12   Apr-13        Apr-14      Apr-15       Apr-16      Apr-17      Apr-18
Source: Bank of England

Banks also continue to treat        Since then, the survey            On the non-price side, the
SMEs differently from their         suggests banks have               Credit Conditions Survey
larger counterparts in the          continued to favour larger        shows that banks have eased
terms and conditions they           firms when changing their         the covenants placed on larger
charge on loans. The Bank           interest rate spreads, although   borrowers to a far greater
of England’s latest Credit          to a much lesser degree—          degree than on SMEs. This
Conditions Survey shows there       meaning that SMEs continue        relates to the behavioural
was a significant easing in the     to pay higher interest rate       conditions that banks place on
interest rate spread that banks     spreads than their larger         borrowers in order to obtain
charged on loans to large           counterparts. The survey also     their loans.
businesses between 2013 and         points to a discriminatory
early 2016—but that this did        policy on the fees and
not occur on loans to SMEs          commissions that banks have
over the same period.               charged on loans in recent
                                    years, again favouring large
                                    versus SME customers.

                                                                                                   17
The Big Business of Small Business

       Fig. 4: New business lending to SMEs via the platforms of P2PFA members
       £ million per quarter
       600

       500                                                                                                                                            527

                                                                                                                                               460
       400
                                                                                                                          407 415 420
                                                                                                  349
       300                                                                                 321             337    331

       200                                                          215
                                                             188                   196
                                                     164                     179
       100                            125      130
                               111
                     82

            0
                     3

                           4

                                      1

                                               2

                                                     3

                                                             4

                                                                    1

                                                                             2

                                                                                   3

                                                                                           4

                                                                                                  1

                                                                                                           2

                                                                                                                  3

                                                                                                                          4

                                                                                                                                 1

                                                                                                                                        2

                                                                                                                                               3

                                                                                                                                                      4
                                     Q

                                                                   Q

                                                                                                 Q

                                                                                                                              Q
                                            Q

                                                                          Q

                                                                                                        Q

                                                                                                                                     Q
                Q

                                                     Q

                                                                                   Q

                                                                                                                 Q

                                                                                                                                            Q
                          Q

                                                           Q

                                                                                         Q

                                                                                                                        Q

                                                                                                                                                     Q
                                     15

                                                                   16

                                                                                                 17

                                                                                                                              18
                                           15

                                                                         16

                                                                                                       17

                                                                                                                                     18
            14

                                                   15

                                                                                 16

                                                                                                               17

                                                                                                                                            18
                          14

                                                         15

                                                                                       16

                                                                                                                      17

                                                                                                                                                   18
                                                                                             20
                                20

                                                                                                                            20
                                                               20

                                                                                                      20
                                          20

                                                                                                            20
                                                20

                                                                                                                                   20
                                                                        20

                                                                                                                                          20
                                                                              20

                                                                                                                     20
                                                        20
         20

                                                                                                                                                 20
                                                                                      20
                      20

       Source: P2PFA

                                                               The stagnation in bank                            The lack of growth in bank

5%
                                                               lending to SMEs contrasts                         lending to SMEs does not,
                                                               with the ongoing expansion                        therefore, reflect a lack of
                                                               in SME activity. In 2018, the                     need for funds on their part.
                                                               total number of UK-based                          On the contrary, an increase in
Increase in total number of
                                                               SMEs (defined as firms with                       available finance would help
UK-based SMEs between 2015
                                                               less than 250 employees) was                      fund the sector’s expansion
and 2018.
                                                               five percent or 266,000 firms                     and job creation.
                                                               higher than in 2015—and there
The number of people                                           was a similar five percent rise                   SMEs are increasingly
employed by UK SMEs                                            in the subset of “small firms”                    applying for—and gaining—
increased by four percent                                      (less than 50 employees).10                       loans through online
over the same period.                                          Similarly, the number of people                   platforms, while moving away
                                                               employed by small firms and                       from thinking “bank first”.
                                                               all SMEs in 2018 were both four                   The latest available BEIS Small
                                                               percent higher than in 2015. As                   Business Survey, undertaken
                                                               a result, employment across                       in late 2017, shows that
                                                               the SME sector now exceeds                        five percent of SMEs applying
                                                               16 million, accounting for                        for external finance over
                                                               60 percent of the UK’s total                      the previous 12 months had
                                                               private sector workforce.                         applied to a lending platform—
                                                                                                                 up from one percent in 2014.
                                                                                                                 The share applying for a bank
                                                                                                                 loan fell from 48 to 38 percent
                                                                                                                 over the same period.11

                10
                     BEIS, Business Population Estimates for the UK and regions 2018, 11 October 2018.
       18       11
                     BEIS, Small Business Survey 2017, May 2018. Here, SMEs are “SME employers”, with 1-249 employees.
The Big Business of Small Business

Reflecting these trends, new                        After adjusting for inflation,      However, there is arguably
lending to businesses via the                       business investment was six         a case for further extending
member platforms of the Peer-                       percent lower in 2018 Q3 than       Exchequer-backed lending to
To-Peer Finance Association                         in 2017 Q4. Furthermore, the        SMEs via lending platforms.
(P2PFA—an industry trade                            January 2019 CBI Industrial         During the financial crisis of
body that includes Funding                          Trends Survey showed more           2008-09 and its aftermath,
Circle and accounts for most                        UK manufacturers expected           the Asset-backed Securities
of such lending) was £1.8                           to cut spending on buildings,       Guarantee Scheme proved
billion in 2018.12 This was 28                      plant, and machinery in the year    successful in supporting
percent higher than in 2017,                        ahead than to increase it. Some     mortgage-backed lending,
and more than three times the                       58 percent of respondents           but had little impact on
value seen in 2015 (Fig. 4).                        to this survey also cited           lending to small businesses.
                                                    “uncertainty about demand”          With the SME financing
P2PFA members’ flow of net                          as a factor constraining their      landscape having changed
lending reached £908 million                        investment intentions.13            so significantly since then,
in 2018—more than double the                                                            lending platforms can
value seen two years earlier.                       Given this outlook, it is           offer a new means for the
This is in sharp contrast to                        reassuring that the importance      government to support small
net lending from the banks                          of supplying funding to             business activity, demand,
to small businesses, which                          SMEs—and in particular, the         and employment.
fell by 104 percent over the                        supply of non-bank sources of
same period.                                        finance—is recognised in the
                                                    UK government-set objectives             In November 2018, the British
As well as offering a source                        of the British Business Bank             Business Bank announced a
of funds to expanding SMEs,                         (BBB). The first two of its              new commitment to lend up
lending platforms offer a                           four prescribed goals are to             to £150 million to UK small
potential economic lever for                        “increase the supply of finance          businesses through the Funding
policymakers during times of                        to smaller UK businesses where           Circle platform.
economic uncertainty. Amid                          markets do not work well”, and
heightened uncertainty about                        to “help create a more diverse
prospects for the UK in the                         finance market for smaller
face of Brexit and the decline                      businesses, with a greater
in the growth of world trade,                       choice of options”.
UK business investment in capital
assets such as new buildings and                    To help achieve these goals,
machinery has declined. This has,                   in November 2018 the BBB
in turn, acted as a drag on the                     announced a new commitment
national economy.                                   to lend up to £150 million to
                                                    UK small businesses through
                                                    the Funding Circle platform.
                                                    This is expected to benefit
                                                    some 2,000 firms, based on an
                                                    average loan size of £70,000.

12
     This is the latest data available.
13
     CBI (Confederation of British Industry), Industrial Trends Survey, January 2019.                               19
The Big Business of Small Business

      2.2 FUNDING CIRCLE’S UK LENDING PROFILE

      In 2018, the value of loans         Fig. 5: Flow of new and net lending to UK SMEs through
      originated by Funding Circle to     Funding Circle
      small UK businesses expanded
      rapidly. Over the year, new         £ million per annum
      lending by Funding Circle’s         1,600
                                                        New lending                 Net lending
      investors amounted to £1.5                                                                        1,525
                                          1,400
      billion (see Fig. 5). Net lending
      through the platform (the           1,200
      difference between new lending                                                1,156
                                          1,000
      and capital repayments)
      followed a similar growth            800
      trajectory, increasing from                                                                               723
      £598 million in 2017 to £723         600         652
                                                                                             598
      million in 2018—a 21 percent         400
      increase, following the 50                                   399
      percent gain seen a year earlier.    200

                                               0
      In 2018, £723 million of                               2016                        2017                2018
      net business lending was            Source: Funding Circle
      extended through Funding
      Circle—some £200 million
      more than the entire UK             Fig. 6: Net lending to SMEs through Funding Circle, and
      banking system (see Fig. 6).        by UK banks
      This pattern is in complete         £ million per quarter
      contrast to that seen during
                                          1,200
      the year to June 2016—just
      before the UK’s referendum            900
      on EU membership—when net
      lending by the banks totalled         600
      £3.5 billion, compared with           300
      the £345 million lent through
      Funding Circle.                          0

                                           -300

£723 million
                                           -600

                                           -900
                                                                      Via Funding Circle             By the banks
                                          -1,200
Total net business lending                    2013Q4         2014Q4          2015Q4         2016Q4     2017Q4       2018Q4
extended through Funding Circle           Source: Funding Circle, Bank of England
in 2018.

This is some £200 million
more than was extended
through the entire UK banking
system that year.

      20
The Big Business of Small Business

The total value of loans under                     Fig. 7: ‘Stock’ measures of lending to UK SMEs through
Funding Circle’s management                        Funding Circle
has also increased, reaching
                                                   £ billion
£2.2 billion at the end of
                                                   4.5
2018. This represents a                                           Cumulative lending
175 percent rise since June                        4.0
                                                                  Loans under management
2016 (see Fig. 7). Cumulative                      3.5
business lending since the
platform launched in August                        3.0
2010 had reached £4.2 billion                      2.5
by December 2018, compared                         2.0
with £1.1 billion in June 2016.
                                                     1.5
Funding Circle facilitates                          1.0
lending to businesses in all                       0.5
parts of the UK, no matter
how rural.During 2018, nearly                      0.0
                                                    Dec-15            Jun-16      Dec-16    Jun-17    Dec-17   Jun-18     Dec-18
21,000 new business loans
                                                   Source: Funding Circle
were arranged through the
platform. By country and
region, the distribution of                        reports this region has seen                      Funding Circle facilitates lending
loans broadly matched that                         the biggest reduction in bank                     to businesses in all parts of the
of the UK’s SME population                         branches since 2015 – some                        UK. During 2018, nearly 21,000
(see Fig. 8). Funding Circle’s                     425, or 13 percent of all branch                  new business loans were arranged
over-indexation in the North                       closures in that period.14                        through the platform.
West is important, as Which?

Fig. 8: Regional distribution of new loans granted via Funding Circle, versus total SME distribution
       % of new UK loans via Funding Circle in 2018                         % of total UK SMEs

           North East
         North West
      Yorkshire & H.
       East Midlands
     West Midlands
 East of England
              London
          South East
         South West
                 Wales
             Scotland
Northern Ireland

                         0%          2%         4%         6%          8%        10%      12%      14%     16%      18%     20%
Source: Oxford Economics; Funding Circle; BEIS                                     % of businesses

14
     Which?, Bank branch closures: is your local bank closing? Jan 2019.                                                     21
The Big Business of Small Business

     Finance was granted to firms                 Fig. 9: New Funding Circle business loans in 2018,
     located in every one of the UK’s             by postal areas
     121 postal areas, from the far               Number of loans
     south-west of England, to the
     north of Scotland. Fig. 9 shows                  0
     how this translates into loans by                1-25
     local authority area, with SMEs
     in nearly all such areas accessing               26-50
     finance through Funding Circle.                  51-100

     Between 2007 and 2017, the                       101-200
     number of bank branches fell                     201-300
     by 37 percent across the UK.15
     While these closures affected                    301+
     both metropolitan and rural
     areas, their impact has typically
     been more negative in rural
     areas, due to the lack of locally-
     available alternatives. According
     to Which?, the 10 local authority
     areas experiencing the most
     bank closures between 2015
     and 2018 included the rural
     areas of Cornwall, Highland, and
     Wiltshire. In 2018, Funding Circle
     facilitated 181, 47, and 98 loans
     respectively to enterprises in
     these areas.

Lending through Funding Circle
reached businesses in the postal
areas of England’s 20 most
deprived neighbourhoods in
2018. A similar picture is seen in
the rest of the UK.
                                                  Source: Funding Circle; Oxford Economics

                                                  Lending through Funding                        as Hull, Grimsby, Burnley,
                                                  Circle in 2018 reached                         and Mansfield. A similar
                                                  businesses in the same postal                  picture is seen in Scotland,
                                                  areas as England’s 20 most                     Wales, and Northern Ireland,
                                                  deprived neighbourhoods.16                     with loans being granted to
                                                  These include neighbourhoods                   businesses in Paisley, Glasgow,
                                                  in and around seaside                          Rhyl, Wrexham, Belfast, and
                                                  towns such as Clacton,                         Derry City, among other
                                                  Blackpool, Lowestoft, and                      areas of particular economic
                                                  Great Yarmouth, and in “de-                    disadvantage.17
                                                  industrialised” localities such

          15
             House of Commons Library, Briefing Paper: Bank Branch Closures, 2018,
          16
             Based on Department for Communities and Local Government, English Areas of Deprivation 2015.
     22   17
             Scottish Government, Scottish Index of Multiple Deprivation 2016; Welsh Government, Welsh Index of Multiple Deprivation 2014;
          Northern Ireland Statistics and Research Agency, Northern Ireland Multiple Deprivation Measure 2017.
The Big Business of Small Business

Fig. 10: Projected real annual GDP growth in key customer industries, and their shares of loans
under Funding Circle management at end 2018

Info. & communication                                                                                                   3.1%     9%

     Professional services                                                                           2.5%      12%

        Business support                                                                             2.5%      12%

     Health & social work                                                       1.8%     4%

        Catering & hotels                                                      1.8%     5%

          Total economy                                                       1.7%     100%

       Wholesale & retail                                                   1.7%      19%

            Construction                                               1.5%     14%

           Manufacturing                                   1.1%     9%

                            0.0%           0.5%            1.0%       1.5%      2.0%       2.5%                          3.0%               3.5%
Source: Oxford Economics Global Industry Model                 Percent per annum, 2018–2028

While Funding Circle’s lending                   2.3 WHAT IS FUNDING CIRCLE’S FULL ECONOMIC IMPACT IN
profile is representative of                     THE UK?
the UK SME sector in very
broad terms, there is some                       Based on our survey of                           a result of the loans through
bias towards industries with                     UK SMEs with loans under                         Funding Circle. We calculate
better-than-average growth                       Funding Circle management                        that 39,200 jobs and £600
prospects, including the six                     at the end of 2018, we                           million in UK tax revenues were
percent of SMEs that are in                      calculate that lending                           also directly supported by
the digital sector and those                     through the platform                             these loans.19
that have embraced the                           directly supported £2.2 billion
rapid adoption of digital                        of UK GDP, and 39,200 jobs.                      But the contribution to the
technology. As illustrated                       Scaling up from the sample,                      national economy does
in Fig. 10, three of these key                   we find that Funding Circle                      not end there. Two further
customer sectors—professional                    clients generated a combined                     channels can be considered:
services, business support                       annual revenue of £41.5 billion—                 the “indirect impact”, which
services, and information &                      of which 7.8 percent can be                      captures the support for
communication—are expected                       allocated to the platform’s                      activity in Funding Circle’s
to grow at a significantly                       activities.18 Of this loan-related               clients’ UK supply chains as
faster pace than the wider UK                    revenue, the firms’ employment                   a result of their purchases
economy over the next decade.                    and capital costs plus net                       of inputs; and the “induced
Between them, SMEs in these                      profits accounted for some                       impact”, which reflects the
three sectors currently employ                   £2.2 billion. This represents                    support provided to the
4.3 million people—26 percent                    the “direct” contribution to the                 wider economy by the wage-
of all SME workers, and 16                       UK’s gross domestic product                      funded expenditure of all these
percent of the entire UK private                 (GDP—the key measure of the                      firms’ staff.
sector workforce.                                nation’s economic activity), as

18
   Business clients with outstanding loans as of 31 December 2018. Scaling up from the survey sample to the overall total is undertaken
on an industry-by-industry basis. The share attributable to Funding Circle is calculated as the share of the Funding Circle loan in total
liabilities on an industry by industry basis.                                                                                                23
19
   These tax revenues comprise corporation tax, business rates, taxes on business purchases (such as fuel duty), employers’ and
employees’ national insurance contributions, and employees’ income tax. Survey respondents were not asked for tax information in this
year’s survey and these results are derived from the direct GVA and employment estimates, taking into account the industry-by-industry
distribution of income and jobs, official data on tax-to-income and tax-to-spending ratios, and features of the UK tax system in 2018-19.
The Big Business of Small Business

We estimate that £1 billion                  Fig. 11: Total economic impact of Funding Circle in the UK, 2018
spent by SMEs on purchases
                                              £ billion per annum                                            Headcount, thousands
from other firms was
supported by the loans under                  4.5                                                                                      80
                                                          £4.1 billion                                          71,900 jobs
Funding Circle management                    4.0                                          Induced
                                                                                                                                       70
at the end of 2018. Of this
                                              3.5              1.3                        Indirect                 20,800
amount, some 80 percent                                                                                                                60
was received by UK-based                      3.0                                         Direct
suppliers, which in turn                                                                                                               50
supported £610 million of GDP                 2.5              0.6                                                  11,800
in UK-based supply chains—                                                                                                             40
                                              2.0
the indirect impact of the
                                                                                                                                       30
loans. Based on the industry-                  1.5
by-industry distribution of                                    2.2                  £1.0 billion                   39,200
                                                                                                                                       20
that GDP, we estimate that                    1.0                                         0.4
it supported a further 11,800                                                                         0.1                              10
                                              0.5
UK jobs, and an additional                                                                0.6
£120 million in tax revenues.                0.0                                                                                       0
                                                             GDP                        Tax                         Jobs
                                                         (left scale)               (left scale)                (right scale)
In addition, spending by
Funding Circle clients’                       Source: Oxford Economics. Note: totals may not sum due to rounding.

employees and by workers
in their supply chains is                    We find that 71,900 jobs were                    a change in the mix of clients
estimated to stimulate an                    supported by these loans,                        by type and size of business,
extra £1.3 billion of UK GDP—                and that the associated tax                      a shift in the lending profile
the induced impact of the                    revenues were worth £1 billion.                  towards more capital efficient
loans.20 This is associated with             The overall employment impact                    firms, or (most likely) some
a further employment impact                  is about the same as the                         combination of the two.
of 20,800 jobs, and a tax                    number of people employed                        In part, this may reflect an
contribution of £360 million.21              in Cheltenham, while the tax                     increase in repeat business,
                                             revenues would be sufficient to                  as firms use their loans to
Combining all three                          fund 31,500 full-time nurses for                 become more productive.
channels, we calculate that                  a year.
the loans under Funding                                                                       The increase in the total GDP
Circle management at the                     Funding Circle’s contribution                    contribution in turn supported
end of 2018 supported a                      to UK GDP in 2018 is more                        further increases in the total
total contribution to UK                     than 74 percent larger                           employment and total tax
GDP of £4.1 billion (see                     than a year earlier, when                        impacts enabled by Funding
Fig. 11).22 This is similar to               it was calculated to have                        Circle.
the total value of goods and                 contributed £2.4 billion
services produced annually                   (see Fig. 12). Over the same
in each of the local authority               period, the value of UK loans
areas of Norwich, Stratford-                 managed by Funding Circle
upon-Avon, Bath, and                         grew by 55 percent. The
North‑East Somerset.                         additional growth in its year-
                                             on-year GDP contribution
                                             is driven by an improved
                                             revenue performance by its
                                             businesses. This could reflect

     20
        In the UK, loans under management do not include loans to property developers, following Funding Circle’s decision in 2017 to no
     longer facilitate this type of finance.
24   21
        The induced tax contribution includes all taxes, such as VAT and excise duties, levied on the consumer spending of the workers, as
     well as taxes levied on businesses, and on workers’ income, in the induced channel.
     22
        This amount only reflects the contribution of finance outstanding at that particular point in time, and ignores any ongoing impact
     related to Funding Circle loans granted in the past but repaid in the interim.
The Big Business of Small Business

Fig. 12: Annual growth in loans through Funding Circle, and the economic activity they support,
between 2017 and 2018
Percentage growth
80%
70%                                                  74%
60%
                                                                                                                       61%
50%                  55%
40%
                                                                                      42%
30%
20%
 10%
     0%
          Loan under management             Annual GDP impact                Annual tax impact                   Jobs impact
                at year end
Source: Oxford Economics

2.4 WHY DO SMALL BUSINESSES USE FUNDING CIRCLE?

According to our survey of                     respondents, with purchase
Funding Circle’s UK clients,                   of new equipment (17 percent),
many of the SMEs want                          a new product launch or
the finance to provide                         development, and workforce
them with working                              expansion (both nine percent)
capital.23 This motivation                     seen as the next most
was cited by 44 percent of                     important reasons (Fig. 13).

Fig. 13: Main reason for seeking finance for the business

                   Working capital                                                                                  44%
       New equipment/machinery                                    17%
Launch/develop a new product                         9%
               Increase headcount                   9%
                   Buy more stock             5%
          Move to a larger premise          4%
                 Seasonal liquidity         4%
                           Marketing         2%
     Expand overseas or exporting           2%
                                Other     3%

                                       0%                 10%              20%           30%                     40%                50%
Source: Funding Circle survey                                            Percentage of responses

 To identify why small UK firms choose to borrow through Funding Circle, a survey of its customers was carried out in January and
23

February 2019.                                                                                                                       25
The Big Business of Small Business

Fig. 14: Main reason for borrowing from Funding Circle

                          Fast process                                                                       27%
             Simple loan application                                                                         27%
             Good customer service                                        11%
           Competitive interest rate                                 10%
                           Better terms                      6%
Only option for an unsecured loan                       5%
                     Mistrust of banks                 4%
      Rejected for a loan by banks                     4%
                                Lower fees    2%
                 Sense of community 1%
                                    Other         2%

                                             0%              05%          10%       15%        20%           25%        30%
Source: Funding Circle survey                                              Percentage of responses

Small firms in the UK continue                Fig. 15: Reasons for not completing a bank loan application
to be attracted by the speed
                                              Percentage of reponses
and ease of Funding Circle’s
loan application process. Of                                   1%
the whole sample of 445 firms,
27 percent said the most
                                                                   10%                               Bank's process was too
important reason for borrowing
from Funding Circle was the                                                                          difficult or complicated
fast process, while an identical                                                                     Application rejected
share were most attracted by                           18%                           38%
                                                                                                     by bank
the simple nature of the loan
application process (Fig. 14).                                                                       Bank took too long

Funding Circle’s clients are
                                                                                                     Bank's rates and fees
deterred from borrowing from                                                                         were too high
the banks by their negative
experiences or perceptions.                                                                          Other
Some 38 percent did not                                             33%
complete the application
process as they thought it too
                                              Source: Funding Circle survey
difficult or complicated (see
Fig. 15). A further 18 percent
perceived it would take too
long, while 10 percent were
deterred by the high interest
rates and fees.

26
The Big Business of Small Business

The majority of surveyed          Fig. 16: Reasons for not approaching a bank first
clients had not approached
                                  Percentage of reponses
a bank before applying to
Funding Circle. Of these
respondents, 66 percent                                                     The decision would
                                  2%               11%                      have taken too long/
believed that a bank’s decision
                                                                            too much hassle
would have taken too long
or caused too much hassle                6%                                 Thought it would be
(see Fig. 16). Others cited the                                             too expensive
potential expense (15 percent),
and an expectation that their
                                                                            Thought I would
application would be rejected          15%                                  be rejected
(six percent).
                                                                  66%       Didn't know how to
A significant proportion
                                                                            approach a bank for
of firms surveyed thought                                                   the finance I needed
they were unlikely to obtain
finance in the absence of                                                   Other
Funding Circle, leading to
negative consequences.            Source: Funding Circle survey
While just over half stated
they would have been likely
or very likely to obtain the
finance they required had
Funding Circle not existed,
a fairly significant 17 percent
of the entire sample felt they
were unlikely or very unlikely
to have obtained finance in
Funding Circle’s absence.

                                                                                                   27
The Big Business of Small Business

CASE STUDY:
KATE LESTER INTERIORS
A business major from the University of               Kate ended up securing her loan just 11 days
Southern California, Kate Lester launched her         after applying with Funding Circle. “Time is
luxury interior design firm back in 2010—“from        something that’s super-valuable to me,” she
my guest room, with $500; no capital, no              says, “so if we can get our financing done
investors. I’m a firm believer that businesses        efficiently, I don’t have any issue with paying
should start slowly and grow slowly; don’t bite       a premium for that. For me to go to a bank,
off more than you can chew.”                          and maybe get one or two points difference in
                                                      the interest rate, wasn’t worth all the back and
So initially, growth of Kate Lester Interiors         forth it would have required.”
came largely by word of mouth. “One fabulous
client told another fabulous client, and it sort of   Similarly, she contrasts the “eight hours I spent
expanded ...”                                         on the phone with my bank, just trying to get
                                                      someone to talk to me” with her experience
But this slow-and-steady approach changed             with Funding Circle. “Jackie was our one
when a “perfect new space” suddenly became            contact person at Funding Circle, and she
available on the Pacific Coast Highway, allowing      knew everything about our loan and where it
Kate to open her first storefront.                    was in the process. We didn’t have to talk to 10
                                                      different people—so that was a huge benefit for
“My bookkeeper said to me, ‘Getting financing         me.”
isn’t a bad thing. You’re going to pay it back;
you just need a little help right now to build        Five months after securing the loan in March
out the space, hire some people, and do a little      2017, Kate opened her new retail space on the
marketing.’”                                          Pacific Coast Highway. Since then business has
                                                      boomed, and she is now focusing on the next
At first, Kate approached her bank for funding        phase of her long-term plan: building her team
“because we already had so much in-and-out            and brand, while helping each client create
cash flow with them”. They turned her down.           spaces that are “luxurious, livable, and unique”.
On the very same day, however, she received
a promotional mailer from Funding Circle and
decided to apply.

28
The Big Business of Small Business

                                     29
The Big Business of Small Business

    3. UNITED STATES
    3.1 SMALL BUSINESSES’ ACCESS TO FINANCE

    During 2018, the US economy       Fig. 17: Senior Loan Officer Survey on how banks’ credit
    achieved its second-longest       standards for approving applications have changed over the
    continual expansion on            past three months
    record, having experienced
                                      Percentage balance
    unbroken growth since June
    2009. Over the year, the US       20%
                                                     Large firms           Small firms
    economy grew by 2.9 percent,
                                       15%

                                                                                                           Tightening
    supported by strong growth
    in consumer spending and           10%
    resilient business activity.
                                        5%

                                        0%
While bank lending to commercial
and industrial customers is            -5%
increasing in the US, small
businesses are being left out.        -10%

                                                                                                Easing
                                      -15%
    And yet, while bank lending       -20%
    to commercial and industrial
    (C&I) customers is increasing,    -25%
    small businesses are being left      2010       2011    2012   2013   2014   2015    2016       2017   2018
    out. According to the Federal     Source: Federal Reserve

    Reserve’s latest Senior Loan
    Officer Survey, more banks
    relaxed their standards for       The Senior Loan Officer                Looking specifically at the
    C&I loans to large and middle-    Survey also suggests the               value of bank lending to small
    market firms than to small        banks were disadvantaging              C&I customers, the pattern
    firms in 2018. On average a       their small corporate                  of demand for, and supply
    net balance of 13.3 percent of    customers in how they                  of, bank loans for different-
    respondents reported easing       changed the terms and                  sized companies is quite
    their credit standards on loans   conditions on loans in 2018.           complicated. But the most
    to large and medium firms         An average net balance of              rapid growth in each of the
    in 2018, while the equivalent     24.7 percent of banks eased            last three years has occurred
    figure was just 3.1 percent for   the interest rate spreads they         in the total value of credit
    loans to small firms.             charged on loans to medium             under $100,000 (including
                                      and large firms, compared              business credit cards) and
                                      with just 13.9 percent for small       loans over $1 million (Fig. 18).
An average net balance of             firms. Similarly, a larger net
24.7 percent of banks eased           balance of banks eased the
their interest rate spreads to        collateral requirements and
medium and large firms in 2018,       covenants for medium and
compared with just 13.9 percent       large firms than they did for
for small firms.                      small firms in 2018.

    30
The Big Business of Small Business

Fig. 18: Annual growth in the value of bank lending to C&I customers in the US, split by loan size
9%
                                                          Less than $100K                             Between $100K-$250K
8%                                     8.5%
                                                          Between $250K-$1 million                    Over $1 million
7%          7.2%
6%
                     5.6%                                                                              5.8%
5%                                                       5.4%
                                                                                                                                 4.7%
4%                                                                                                             4.2%
3%                                                                                  3.3%
                                                                                                                        2.7%
2%
                              1.9%                                1.8%
 1%                                                                        1.4%

0%
                         2016                                          2017                                     2018Q1-Q3
Source: FDIC

The size of loan that a                         The latest Small Business                        Larger SMEs are more likely
firm applies for is heavily                     Credit Survey suggests                           to seek external finance:
correlated with its size.                       there is a strong appetite for                   according to the SBCS, the
According to the latest                         external finance among SMEs.                     proportion of small businesses
Small Business Credit Survey                    This continues to reflect their                  applying for external finance
(SBCS), some 69 percent                         desire to expand (a 2018 survey                  over the past 12 months ranged
of the loans applied for                        by the National Federation of                    from 35 percent of firms
by firms with one-to-four                       Independent Business found                       with one-to-four employees,
employees, and 57 percent                       that 60 percent of small firms                   up to 51 percent of firms
of those by firms with five-                    had made a capital expenditure                   with between 50 and 499
to-nine employees, are under                    in the previous six months).                     employees (Fig. 19).
$100,000.24 In addition, 43
percent of loans applied                        Fig. 19: Share of SMEs that applied for financing in previous
for by firms with 50–499                        12 months
employees are over $1 million.                  60%
Following our earlier analysis,
this suggests the US’s                          50%
smallest firms, and also some                                                                                    50%               51%
                                                                                                46%
medium-sized firms, have                        40%                            44%
been particularly successful
in increasing the value of the                  30%          35%
loans they obtained between
2016 and 2018 Q3.                               20%

                                                 10%

                                                  0%
                                                            1-4              5-9              10-19             20-49           50-499
                                                         employees         employees        employees         employees        employees
                                                Source: Small Business Credit Survey 2017

24
   The SBCS is the most comprehensive survey of its kind in the US, carried out nationally by the 12 Federal Reserve banks. It collates
information on small business financing needs, decisions, and outcomes. For the purposes of this survey, ‘small businesses’ include all
firms with fewer than 500 employees.                                                                                                      31
The Big Business of Small Business

However, small US businesses                  Fig. 20: Firms reporting credit availability as ‘a challenge’, by
continue to report difficulty                 firm employee size-band
in accessing credit, with                     Percentage share of firms
the smallest firms facing
the most severe difficulties.                 35%
Some 32 percent of firms
                                              30%           32%
with between one and
nine employees reported                                                          29%
                                              25%                                                   27%
experiencing challenges
obtaining credit over the                     20%
previous year. This figure
                                               15%                                                                  18%
drops to 18 percent for SMEs
with over 50 employees.
                                               10%
These difficulties echo the                    5%
share of small businesses that
have their credit applications                 0%
                                                            1-9                10-19               20-49           50-499
rejected, or obtain only a
                                                         employees           employees           employees        employees
proportion of the external
finance they seek. The SBCS                   Source: Small Business Credit Survey

shows that smaller firms are
much more likely to have their                insufficient credit histories for              loans either got rejected or did
applications rejected—just as                 younger firms, and their lack                  not obtain all the finance they
they are more likely to receive               of assets to offer as collateral.              sought (see Fig. 22). In all, 22
only part of the loan they                                                                   percent of loans of this size
requested (see Fig. 21). In part,             When looking at outcomes                       were rejected, the highest of
this reflects the difficulties                based on loan size, SMEs                       all rejection rates. The “funding
lenders have in judging smaller               applying for credit of between                 gaps” for loans of less than
businesses’ credit risk, due to               $25,000 and $250,000 face                      $25,000 and over $250,000
a combination of the lack of                  the most difficulties. Some                    were broadly similar, at 46 and
publicly available information,               58 percent applying for such                   47 percent, respectively.

Fig. 21: Outcome of small businesses’ finance applications, by firm employee size-band, 2017
Percent of total
80%
                None             Partial amount requested                  Full amount requested
70%
                                                                                                                        70%
60%
                                                                            58%                     58%
50%
                                                   47%
40%
30%              36% 38%
                                             33%
                                                                    27%                       29%
          26%
20%
                                       20%                                                                        21%
10%                                                          15%                       13%
                                                                                                             9%
 0%
           1-4 employees               5-9 employees         10-19 employees         20-49 employees       50-499 employees
Source: Small Business Credit Survey

32
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