British Government Boards The P2P Lending Train: Plans To Loan £30M Through Funding Circle, Zopa

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Despite bailing them out (and practically owning some of them), the UK government seems unable to force high street banks to begin lending to small businesses again and this is causing a big problem for the economy — the wheels of capitalism won’t grease themselves. The latest solution coming out of the Department for Business Innovation & Skills is to board the P2P lending train.

The UK government has pledged £110 million of tax payer’s money to lend to SMEs through ‘alternative finance’ schemes and today we’ve learned that two P2P lending sites, Funding Circle and Zopa, stand to benefit, with each receiving £20m and £10m respectively.

The capital injection isn’t in the form of an investment. Instead, the British government will effectively become a user of both sites — should it get Parliamentary approval — lending money to small businesses who harness either site’s P2P lending platform, and receiving interest in return. Additionally, the money is being pledged on the condition that it is matched by private lenders using either site who, in the case of Funding Circle, will be required to make up 80% of each loan — and my understanding is that there are other systems being put in place to ensure that the extra money doesn’t distort the overall lender/borrower market of each platform.

In a canned statement the 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.”

The use of the words “small scale” is perhaps apt. £30 million is a tiny amount in the big scheme of things and is unlikely to move the needle much on the economy. But in the words of one of Britain’s supermarkets, every little helps. To that end, Index, and Union Square Ventures-backed Funding Circle, which unlike Zopa, has targeted SMEs from the get-go, says that in the two years since launch it has lent more than 1,300 UK businesses £65 million through its platform, whilst last month alone it lent £7m.

Today’s announcement comes hot on the heels of Zopa raising another new round of funding, said to be in the “multi-millions”, having previously raised almost $40m. It’s also in the context of another P2P lending development related to the UK government. It’s planning to regulate the P2P lending sector, something that is said to be welcomed by the major players and could provide the legitimacy required to bring this alternative form of financing into the mainstream and really give the banks a run for their money.