The following article is a guest post from Yann Murciano, CEO of Blend Network.

Since November 2016, as part of the Small Business Enterprise and Employment Act 2015, the UK’s nine major banks are legally required to refer those SMEs they refuse to finance to an alternative provider. The last figures published in August 2017 for the first nine months of the scheme were quite unimpressive: less than 3% of small businesses referred to alternative lenders via the bank referral scheme ^[1] were funded, that is some £4m in completed funding deals for the first nine months of the scheme. However, despite a sluggish start, we are now seeing an increase in conversion rates. Recent months have showed a significant pick-up in referrals, partly due to promotion of the scheme by the banks themselves. Of course, full effectiveness of the scheme will take time to achieve but if recent trends are something to go by, the trend looks encouraging.

The increased conversion rate is eagerly welcomed and needed. The funding gap is nowhere more evident than in the construction sector: according to a recent survey by the National Builders Association ^[2], availability of finance is the single greatest issue many SME property developers face. The Bank of England data shows that bank lending to SME construction companies amounted to £6.6bn in 2017, only modestly up from £6bn in 2016. Yet based on the government’s targets of building 300k new house per year over the next five years and an assumption of £80k per each new house, circa £20bn per year is needed just to achieve the government targets and keep up with population growth. The reality is that current lending from mainstream banks leaves a big gap in the property finance market and traditional lenders cannot deliver the best products and services for their customers without the help from Fintech firms.

We have seen this at Blend Network across several of our loans. Borrowers are experienced SME property developers operating in niche markets where traditional lenders are no longer active due to changes to their lending criteria following the 2008 financial crisis. For example, the borrower behind our Cross Keys loan in Scotland was looking to re-finance a tenanted pub and buy-out the remaining other stakeholder to sell the property. Traditional lenders were unable finance this deal. We, however, looked at the deal, carried out our due diligence, assessed the exit plan and were able to provide a 24-months loan at 15% interest rate p.a. Since the property was tenanted, the borrower was able to service the debt monthly and repaid the loan early following the completion of the sale. This represents a perfect example of deals where P2P lenders are able to successfully fill in the gap left by traditional lenders and support SMEs. The key point to understand is that both traditional lenders and P2P platforms have their own unique strengths and are better off working together as partners helping their customers to deliver the products or services that meets that customer’s needs. As Helen Keller said, ‘alone we can do so little, together we can do so much’.

But what is also important to point out is that being turned away from the mainstream lenders does not mean that the SME is high-risk, it could simply be that the mainstream lenders are changing their lending requirements and rules. This is also the message to lenders: in peer-to-peer lending, higher return does not always mean higher risk. Fintech has already been harnessing a force for good enabling positive change in industries such as retail banking, trade, health, employment and education and now… the establishment of a strong P2P investment framework and associated technological platform is enabling a conductive environment for financial inclusion of SME property developers.

BLEND Loan Network Limited is an Appointed Representative of Resolution Compliance Ltd which is authorised and regulated by the Financial Conduct Authority (FRN.574048)