Vince Cable launches £110m loan scheme aimed at small firms, the oldest peer-to-peer lender matching savers with borrowers has lent £250m over the past seven years

The government is to bypass the traditional banks and lend money directly to small businesses and small traders at an interest rate of about 7%-8% in a £110m scheme that will use so-called ‘peer to peer’ internet-based lenders such as Zopa and Funding Circle.

The business secretary, Vince Cable, will announce tomorrow that four peer-to-peer lenders will be given a total of £55m in taxpayers’ money, and be expected to match that amount from private sources in a huge boost for what is still a fledgling business model in the UK.

The move comes amid concern that the traditional banks are failing to get credit from schemes such as Funding for Lending into the hands of struggling small- and medium-sized enterprises (SMEs).

Funding Circle, an online marketplace for loans that is two years old, will receive £20m to lend to other businesses, while Boost Capital will also be given £20m. will receive £10m and Credit Asset Management £5m.

Each lender will only receive the money if they are able to match the sums with investments from private savers.

Business Secretary Vince Cable said: “Small- and medium-sized businesses need access to a diverse range of finance options, including non-bank lending. These new forms of finance are still small in scale today but they should, over time, bring additional choice and greater competition to the lending market.”

Cable added that the £55m is the first tranche of £100m on offer through the Business Finance Partnership, targeted at organisations which can offer alternative sources of lending to small businesses.

“Today’s funding announcement is just the type of help that the new Business Bank will offer. The Bank, which will be operational by 2014, is being designed to tackle these long-standing, structural gaps in the supply of finance for SMEs.”

Peer-to-peer lending cuts out banks by matching savers over the internet directly with borrowers. is the longest established player, lending £250m over the past seven years, while Funding Circle has loaned £65m.

The move is expected to help break the stranglehold of the major banks on lending to small businesses, who complain they are charged excessive interest rates and fees for borrowing. According to the Treasury, the top five high street banks account for 92% of lending to small business. Funding Circle says that many businesses turn to them for finance not because they have been turned down by the major banks but because the process is slow and expensive.

The government will receive the same rate of interest that other investors obtain when they lend on a peer-to-peer basis. The loans will typically be on three-to-five year terms, starting at around £10,000 through to £500,000.

Last month Lancashire County Council announced it would offer £100,000 through Funding Circle to help businesses in the county, citing it as “a ground-breaking new way to fund business growth and a first for any council in the UK.”

Peer-to-peer lending works by enabling established and creditworthy businesses to borrow money from groups of people. Businesses first have to pass a credit assessment, then their request for a loan is posted on the marketplace. From there, investors choose which type of businesses to lend to, and bid the amount of money they wish to lend, and the interest rate they want to earn. Investors bid small amounts, from as little as £20, on lots of different businesses to spread their risk.

Interest rates paid on the loans vary minute by minute as borrowers are matched with lenders. Funding Circle says that typical ‘A’ rated businesses agreed an interest rate of 7.1% , rising to 10% for ‘average’ rated busineses.

Zopa, which will be lending to sole traders rather than bigger businesses, says its ‘A’ rated customers pay around 6.7% for a loan, compared to the 8%-12% charged to personal customers by the major banks. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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