Journal of Credit Risk

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Small and medium-sized enterprises that borrow from "alternative" lenders in the United Kingdom: who are they?

Gabriele Sabato, Edward I Altman and Galina Andreeva

  • We compare SME loans of an alternative lender to a population of UK SMEs.
  • SME loans in our sample have lower credit risk than a generic UK sample.
  • At least some alternative lenders lend to relatively good credit risks.
  • Therefore, they act as a substitute to traditional banks.

Access to credit for small and medium-sized enterprises (SMEs) is an important condition of successful economic growth. Lending to SMEs is no longer restricted to banks: many new players (or alternative lenders) are entering the credit market. However, the research has not identified what kind of SMEs choose these alternative lenders. Are they just a random sample from the overall population of SMEs or are they different in some specific respects? Is their credit quality better or worse? This study provides a general overview of the external financing landscape for the UK SMEs and an exploratory analysis of the SME portfolio of one of the alternative lenders in the United Kingdom. The results indicate that clients of the alternative peer-to-peer lender are younger and have more debt, but they also have higher returns than a generic sample of UK SMEs. Their probability of default, as estimated by the SME Z-score, is lower. We conclude that the alternative markets for SME lending may be heterogeneous in terms of risk. At least some alternative lenders have a sound risk level and are attractive to high-quality borrowers. Therefore, they act as a substitute for traditional lending.

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