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Smaller businesses are turning to alternative ways of financing in much larger numbers than five years ago, as traditional lending flatlines, according to a new report.

Marketplace business lending, which used to be called peer-to-peer, is now providing more than £2 billion a year to British small and medium sized businesses (SMEs), the British Business Bank said.

It is a 374% rise since 2014, the year the bank was set up by the government.

Meanwhile equity finance, providing money in exchange for a stake, has jumped by 131% over the same period.

Since it was set up the Business Bank has provided support to success stories such as cybersecurity outfit Mimecast, and fintech firms Transferwise and Revolut.

Earlier this week Revolut announced it had raised another 500 million US dollars (£387 million), giving the business a valuation of around £4.3 billion.

But while alternative financing has boomed in the last five years, gross lending from major banks to smaller businesses has remained largely flat, growing just 1.2% in real terms.

Gross bank lending reached £56.7 billion last year.

In 2014 it was £53 billion.

Last year 52% of smaller businesses that wanted financing looked beyond the Big Five banks, according to the research.

There is evidence that the flatline in traditional lending is due to demand from businesses drying up, British Business Bank chief executive Keith Morgan told the PA news agency.

More than 70% of them say that they would be willing to forego some future growth rather than take more loans.

Mr Morgan said that small business confidence seems to have rebounded in recent months.

“We are seeing some indication that confidence has rebounded given the additional clarity that is now present with the outcome of the general election and the increased understanding of the course with respect to Europe,” Mr Morgan said.

However it is too early to say whether that will increase demand for finance, he added.

Business Minister Paul Scully said: “Finance for small businesses is essential to our goal of making the UK the best place in the world to start and grow a business.

“This report will shape our support for business leaders across the country, so they can drive innovation and growth.”

By August Graham

Source: Yahoo Finance UK

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