* To refer rejected firms to Funding Circle, Assetz Capital
* Peer-to-peer growing rapidly
* RBS to start pilot scheme next week (Adds finance minister, Funding Circle quotes)
By Matt Scuffham
LONDON, Jan 22 (Reuters) - Britain's biggest lender to small businesses, Royal Bank of Scotland, will start steering its rejected corporate loan applicants to alternative finance providers from next week, it said on Thursday.
RBS, which provides a third of all lending to small and medium sized enterprises in Britain, said it expects to advise thousands of businesses to contact peer-to-peer lenders Funding Circle and Assetz Capital.
The scheme comes ahead of government plans to make such referrals compulsory after criticism that Britain's biggest banks are failing to provide sufficient credit to a sector the government sees as having an important role in stimulating the economy.
"A key part of our long-term economic plan is to ensure that British businesses are able to access the finance they need to grow and succeed," Britain's finance minister, George Osborne, said in a statement on Thursday.
Peer-to-peer lending has grown rapidly since the financial crisis of 2007 to 2009, with bank credit remaining scarce for small businesses. These new services allow investors to lend directly to individuals and businesses via low-cost online platforms.
The market for peer-to-peer lending in Britain totalled 1.7 billion pounds ($2.58 billion) last year, nearly half of which was business lending, according to a study by the University of Cambridge and charity NESTA.
RBS said that the peer-to-peer market contributes about 1 percent of total lending to small businesses, adding that such funding is growing by 200 percent a year.
The RBS referral scheme will be piloted in Scotland and southwest England, starting next week, with the intention of expanding it nationally over the next three months.
Funding Circle, which launched in 2010, is now the fourth-largest net lender to small businesses in Britain and has so far enabled more than 7,000 businesses to borrow 490 million pounds.
"Partnering with the UK's biggest small business high street lender is a huge vote of confidence in our model," its founder Samir Desai said.
Santander began a similar relationship with Funding Circle last year. ($1 = 0.6586 pounds) (Editing by David Goodman)