European Investment Bank is backing small businesses

BII

This story was delivered to BI Intelligence "Fintech Briefing" subscribers. To learn more and subscribe, please click here.

European Investment Bank (EIB) has announced that it will lend $147 million to small businesses through Funding Circle, a U.K.-based peer-to-peer (P2P) lending platform.

EIB is the European Union's bank. The 28 member states of the EU own the bank, which in turn represents their interests. And one of those interests is to improve access to funding for small businesses.

This $147 million investment is the first time EIB has distributed funds through a direct lending marketplace in order to support small businesses. However, other European government organizations have lent through Funding Circle.

The firm specializes in small business lending, and government organizations like to fund this group because they stimulate the economy and create jobs. Earlier this year, the European Investment Fund and German development bank KfW invested in loans securitized by Funding Circle.

But this funding could evaporate if the U.K. votes to leave the European Union in what everyone is calling the Brexit. Funding Circle has said that if this comes to pass, then it would struggle to secure similar funding agreements with other European bodies in the future, reports the Financial Times.

This creates a problem for P2P lenders because when sources of funding disappear, then the platform's ability to make loans follows suit.

Small businesses are equally important in the U.S., where they represent 99% of US companies, 54% of total sales, and 55% of all jobs, according to the US Small Business Administration.

These businesses need capital in order to grow, but small businesses are underfunded — only half of small businesses with $100,000 to $1 million of annual revenue received at least some of the financing they applied for from large banks in late 2015. This is partially because banks have retreated from this segment because issuing loans to small businesses using the traditional underwriting model is expensive. This leaves a massive amount of unfulfilled loans that we estimate reached $96.5 billion in Q4 2015.

Alternative lending companies have stepped in to capitalize on the opportunity available in helping meet more small business' lending needs.Alternative small business lending platforms use machine learning and digital tools to extend credit to a wide array of small businesses quickly and efficiently, particularly to those that have been rejected by banks. Alternative small business lending companies provide digital platforms that connect small business borrowers to capital using nontraditional means.

We estimate that alternative small business lenders originated $5 billion and had a 4.3% share of the small business lending market in the US in 2015. But alternative small business lending platforms will originate $52 billion and gain a 20.7% share of the total market by 2020, driven by the continued growth of new players, increased borrower awareness and interest, and most importantly, major partnerships with big banks.

Evan Bakker, research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on small business alternative lending that analyzes the market opportunity for alternative lenders, forecasts the market share and volume growth of alternative lending platforms, profiles key players, and addresses the main industry risks.

Here are some key takeaways from the report:

• Alternative lending platforms are in a position to capitalize on this underfunding and also take share from banks. These companies use machine learning and digital tools to extend credit to a wide array of small businesses quickly and efficiently. We estimate that alternative lending companies' share of the small business lending market in the US will reach 20.7% by 2020.
• Alternative lenders are now partnering with banks and this will propel growth going forward. New lenders are finding opportunities to offer white-label services to major banks. We expect banking partnerships, like the one between JPMorgan and OnDeck, to add 7.7 percentage points to the alternative lending industry's market share by 2020.
• A flurry of new lenders have entered the market, but it's still early innings. A handful of small business lenders, from Funding Circle to Credibly, have entered the market and this is creating challenges as customer acquisition costs rise and alternative lending companies struggle to differentiate themselves.

In full, the report:

• Forecasts the market share and volume growth of the small business alternative lending sector, and breaks down the main growth drivers.
• Explains why small businesses are underfunded, and quantifies the market opportunity for alternative lenders.
• Defines the different types of platforms that alternative lenders employ, including their revenue models.
• Lists the advantages and disadvantages that alternative lenders have compared to traditional players.
• Overviews the key players in the industry and identifies their growth factors as well as the pain points limiting their growth.
• Pinpoints the key risks that could undermine the success of alternative platforms

To get your copy of this invaluable guide, choose one of these options:

1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
2. Purchase the report and download it immediately from our research store. >> BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of small business alternative lending.