Modern solution to the problem of financing small firms

EUROPEANS are catching up with Americans in their use of peer-to-peer lending, the online funding method designed to sidestep banks and tap individual lenders directly for their cash. But it's playing a very different role on either side of the Atlantic.

In the US, a platform like Lending Club typically helps individuals fund pet projects or personal needs - lining up "Rebecca, Durham NC" with US$5,000 at 9.98 per cent interest to "pay off credit cards". In the UK, by contrast, websites like Funding Circle are providing funding for genuine businesses - £40,000 (S$84,100) to "Guy in Bradford", say, to modernise his yarn business. These Web-based platforms could serve as a much-needed bridge between bank loans and capital markets.

A report by Cambridge University's Judge Business School estimates that the European market for online alternative lending - encompassing everything from reward-based crowdfunding to business loans - has the potential to reach seven billion euros (S$10.8 billion) this year, a near sevenfold increase in just three years.