Will zero interest rates benefit the alternative lending market?

Last month the European Central Bank (ECB) surprised financial markets by announcing that it was cutting interest rates in the Eurozone to zero. The ECB has justified the drop, suggesting it will help to stabilise the economy in the EU and increase inflation. Looking outside Europe, rates in the US also continue to challenge cash managers’ creativity despite recent increases by the Federal Reserve.

This recent announcement from the ECB is a positive move for businesses looking to borrow money but obviously has a knock on effect for business lending and saving. With interest rates at a record low, businesses that are cash heavy will no longer benefit from simply keeping money in the bank and therefore would be wise to investigate other investment options if they’re looking for return on their cash.

It will be interesting to see the impact this announcement has on the alternative lending market, as business funding options like peer to peer lending, crowdfunding and supply chain finance will no doubt be seen as sensible choices for larger businesses with cash to invest.

At Tungsten for example, we have created distinctive finance solutions that ensure businesses and their suppliers can better manage their working capital position to stimulate business growth. As we connect tens of thousands of businesses globally to create trading efficiencies, we understand the challenges facing both sides of the fence and appreciate their mutual roles as critical parts of the trading network and wider business ecosystem.

Ensuring smaller businesses have access to a steady flow of cash is crucial for a healthy supply chain. And without access to short-term and flexible funding many businesses struggle to grow, as those cash injections can mean the difference between being able to purchase new stock and pay staff on time or not.

Supply chain financing is a great solution to address this, and offers benefits to both large buyers and their suppliers. Cash is like oxygen to a small business and if a large customer has the ability to support smaller suppliers by advancing outstanding invoices, this will benefit the whole supply chain and can generate a better return on their excess cash in a low interest rate environment. Providing this opportunity for the small business to advance funding will stimulate growth and ultimately lead to better working capital management for both parties. Tungsten facilitates this as a non-bank, alternative financing option integral to our customers’ existing trading tools.

It’s too soon to see whether this latest announcement from the ECB will have a significant impact on alternative lenders but it will certainly be interesting to see how it plays out. Regardless, the alternative lending market is growing significantly, with the latest report from The British Business Bank noting that there was approximately £2.8bn gross lending facilitated by online platforms in 2015, highlighting the significant role online lending platforms have played in diversifying funding for businesses.

If nothing else, this latest development is likely to reinforce the message that the buyer/supplier dynamic is changing and that technology and the rise of new entrant alternative lenders will increasingly play a part in greasing the wheels of the supply chain.

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