Social networks of investors are lending millions of euros' worth in loans to entrepreneurs and small businesses in a growing trend of peer-to-peer funding for companies online.
Funding for SMEs has begun to dry up as banks attempt to deal with the euro crisis and the pressure from both governments and markets to strengthen their balance sheets.
"The issue of financing is a pressing issue and it is not going to get better," Daniel Calleja-Crespo, the Deputy Director General for Industry and Entrepreneurship from the European Commission said at an event on SME financing yesterday (6 October).
Small businesses which have been turned away by banks have found funding through social lending, otherwise known as peer-to-peer or crowd lending, though in the EU the phenomenon is still not well established.
In France, Catherine Maugée, the founder of Be Bio, an organic foods supplier for companies, managed to clinch €3,000 from a group of investors from the online lender FriendsClear after she was turned down for a bank loan.
Maugée said she has never met the investors in person but that she had to supply them with elaborate business plans. All clients also undergo credit checks with the help of bank records.
Peer-to-peer lending: Business angels
Peer-to-peer lending started in the US but in the last two years different companies have begun to emerge in the UK, France and Germany.
According to a survey by the Association of Chartered Certified Accountants, entrepreneurs' lack of awareness about social lending is the biggest reason why peer-to-peer lending is still a niche enterprise in the EU; security concerns rank second.
In the US, where the industry is beginning to boom, investors are turning to peer-to-peer lending at a time when stock markets are fickle and predicted to remain volatile for many years to come. The level of risk can also be much lower as loans are often shared among a group of lenders.
The leading company in the US, LendingClub.com, issues nearly €30 million every month to start-ups and small businesses.
"They are kind of business angels," Jean Christophe Capelli, the founder of the French outfit, FriendsClear said at a presentation to the European Parliament yesterday.
Lower interest rates
Capelli said that the immediate nature of the internet was propelling peer-to-peer funding because investors are compelled to compete with each other.
For example, British company Zopa allows lenders to specify their interest rates and allows other lenders to join in with potentially lower interest rates, driving rates down even lower.
"Peer pressure is the magic of social networks," Capelli said.
Lenders can also easily register on multiple sites and can see that the same businesses are looking for finance elsewhere, in some cases forcing their hand to invest.
As with any lucrative business, however, it is open to abuse. In the UK established group online financiers have set up a self-regulatory body to create a higher level of protection for both the investor and the consumer.
In Britain this year, peer-to-peer finance will account for more than £100 million of loans to individuals and small businesses.
“We’ve seen some new entrants over the last year or so and the way a couple of people might be operating their platforms and not investing in risk is concerning,” Zopa founder, Giles Andrews, told British media last month.