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SME banks and the next step for alternative finance

News of plans to establish a Development Bank of Wales and an SME bank in London and Manchester points towards the next step in the growth of alternative finance.

Much has been made of the rapid growth of alternative finance in recent years and the way in which services such as invoice finance, peer-to-peer lending and crowdsourcing are changing the face of small business finance, but traditional lenders still dominate the SME lending marketplace. The creation of specific SME banks could help push the alternative finance sector further into the mainstream.

The proposed publicly owned Development Bank of Wales would focus on start-ups and microbusinesses and would be an alternative to further involvement by the Welsh government in trying to improve access to SME lending. At this stage, there is talk of giving small businesses more choice in terms of funding and this is where alternative finance, including asset-based finance and angel investors, could play a key role.

Similarly, OakNorth SME bank has pledged to offer small businesses greater flexibility and easier access to finance. Again, talk of wider use of the latest financial technology suggests that alternative finance will have a part to play.

This fresh injection of impetus into the development of the alternative finance sector would certainly be welcome, not least as it would take the pressure off underperforming government SME finance initiatives. The failure of the Funding for Lending Scheme has been widely discussed and this has been followed by news that the Department for Business Innovation and Skills’ Growth Vouchers programme, launched in January 2014, has handed out less than 4% of its £30 million budget.

Regardless of whether the Growth Vouchers programme recovers, there is a clear need for a new stage of development in terms of SME finance, and the creation of SME banks using alternative finance could be it.

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