Crowdfund Insider | JD Alois | Nov 8, 2015

Karen Mills, former Administrator of the Small Business Administration and current Senior Fellow at Harvard University, co-authored a study on credit markets and SMEs back in 2014.  She recently presented at LendIt Europe on the state of Marketplace / Peer to peer lending.

While at the SBA, Mills discovered there was a credit gap as banks refused to give small loans to businesses leaving an important part of our economy out in the cold.  Mills did what she could while at the SBA and boosted loans to small business but it wasn’t enough.

In the US, small firms create 2/3 of the net jobs.  In the UK, 65% of net job creation comes from small business.  These small companies were the hardest hit during the financial crisis. Ironically they were also part of the collateral fallout when banks had to tighten their balance sheets pulling credit from SMEs thus exacerbating the financial duress further.

Highlights:  State of Small Business Lending in the US and UK

• Small businesses (SB) are important:  produce 50% of private jobs and represent 2/6 of NET job creation in the US & UK
• SB were hit hard during financial crisis representing 60% of job losses
• US credit froze after crisis, slow to recover for small firms
• Bank loans to SBs fell dramatically
• 70% of SMs loan requirements aren't profitable for banks (loans <$250K) creating credit gap
• Three loan models emerged with P2P model dominating business lending:
  • Institutional driven P2P marketplaces
  • Borrower-driven broker marketplaces
  • Balance sheet lenders
• Online lending marketplaces are evolving rapidly (more of everything:  customers, products and sources of capital)
  • US:  47% annual growth and projected to be 16% of issuance by 2020 ($47billion)
  • UK:  55% annual growth and projected to be £9 billion by 2020
• Two views on regulation:
  • Need for regulation (no federal regulator currently)
  • Improve existing regs to encourage market mechanisms (let nascent market develop, clarify/streamline oversight and improve transparency

Related Links:

• Interview: Canada’s P2P Small Business Marketplace, Lending Loop, Gains Traction
• Lending Loop Launches Online Marketplace for Canadians to Lend Directly to Main Street
• How Marketplace Lending is Disrupting Consumer Loans in Canada

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