Use of community lenders rises as cost of living pressures see more refused loans elsewhere
Community lenders saw a 22 per cent increase in customers in 2022 as the deteriorating economic environment helped exclude ever larger numbers from the traditional financial sector.
According to new figures from Responsible Finance, community development finance institutions (CDFIs) increased total lending by 20 per cent in 2022 to £248m, reaching 94,744 customers.
The majority of CDFI lending (£117m in 2022) went to ‘social enterprises’. A further £81m was lent to 3,230 start-ups and small businesses, helping to create 8,120 jobs.
Some 99 per cent of the businesses which borrowed from CDFIs in 2022 had previously been declined by another lender, Responsible Finance noted.
Theodora Hadjimichael, chief executive of Responsible Finance, said: “Small businesses faced many challenges in 2022 which affected their financial positions. Inflation, increased costs of doing business, and uncertainty have affected many firms, meaning it is becoming harder to get loans.”
The remaining £46m was made up by personal lending, up 33 per cent on last year. This helped households save £28m in interest payments that they would have paid to a higher-cost lender.
CDFIs are non-profit lenders based in local communities that make personal loans at low interest rates to households and businesses which struggle to access credit elsewhere.
CDFI usage has climbed steadily in the last few years. Earlier this year there were hopes that local finance would enter a “new phase” after Jack Dorsey’s Block invested £2m into a Birmingham-based not-for-profit lender.
Warren Mutch, head of speciality finance at Shawbrook Bank, said: “CDFIs are playing an increasingly important role in delivering positive economic, social and environmental impact.
“Access to finance on fair terms enables individuals, businesses, and social enterprises to achieve their goals, helping society to benefit from greater inclusion,” Mutch continued.
Usage of credit unions is also on the rise. In the fourth quarter of 2022, the total value of loans to members increased 4.8 per cent, surpassing £2bn. Credit unions are member-owned financial cooperatives which provide loans to their members.
Both CDFIs and credit unions provide an alternative to high-interest payday lenders for borrowers with a poor credit score.