By Kylie MacLellan
LONDON (Reuters) - Small British businesses have turned to seeking funding from members of the public online because of the slow speed at which banks process loan applications, a report showed on Friday.
Peer-to-peer lending, which allows small investors to earn interest from loaning money to individuals or businesses, is one of several alternative sources of finance that have grown up as banks ration credit in response to tougher capital rules and the economic slowdown.
This week the British government gave banks greater incentives to lend to small firms in a bid to inject new life into the country's stagnant economy.
The report, produced by innovation charity Nesta using data from Britain's largest peer-to-peer business lending website Funding Circle, found the length of time it takes to secure a bank loan, rather than the availability of loans, was the most common reason given by firms for choosing the online route.
More than 75 percent of the 89 companies surveyed also said they would go to Funding Circle first for future funding.
"Coupled with the recession, it's the explosion of social media and the use of (the) Internet that has made it easier and cheaper to connect those who want to invest with the businesses that need finance," said Stian Westlake, executive director of policy and research at Nesta.
British and U.S. authorities are working out how best to regulate the wider crowd funding industry, which also includes sites that enable individuals to buy small equity stakes in companies or fund creative projects in return for non-financial rewards, such as a copy of an album.
Crowd funding websites helped companies and individuals worldwide raise $2.7 billion (1.7 billion pounds) from members of the public in 2012, an 81 percent increase on the previous year, data showed earlier this month.
Regulators are keen to make sure investors are aware of the risks and ensure the sites vet firms adequately to avoid scams.
Nesta said 88 percent of the 630 lenders surveyed had other investments such as stocks or bonds, while 38 percent had more than 10 years experience working with small- and medium-sized firms.
On average, Funding Circle lenders had invested a total of 7,983 pounds and 75 percent said they expected to increase the amount of money they put in over the coming year.
(Editing by David Holmes)