2016: Brexit, bank funding and bureaucracy

Boost Capital's Alex Littner dissects the biggest events in alternative finance and the SME ecosystem to have happened over the past year.

‘Unpredictable’ would be an appropriate word to characterise 2016. It’s certainly been a year that’s delivered big surprises, a few seismic changes, and – more positively – some progress for small businesses. Looking back over the last 12 months, what have been the major events affecting SMEs in the UK? And, what are the reasons, if any, for business owners to feel optimistic about the year ahead?

Referendum repercussions

It’s impossible to talk about 2016 without mentioning the upset caused by Brexit. After the vote in June for the UK to leave the European Union, the value of sterling fell dramatically, catching many businesses unawares. In particular, importers faced sharply rising costs. However, exporting firms enjoyed a bit of a boost at the pound’s expense – though such benefits may yet be outweighed by inflation.

Crushed by the referendum result, David Cameron resigned as Prime Minister only to be replaced by Theresa May. In fact, Number Ten’s door scarcely stopped revolving in the days after the vote, with May assembling a new Cabinet team. The turmoil at the top continues, with in-fighting now the norm among Tories divided between those who support a so-called hard Brexit, and the MPs who favour a softer approach.

SME bosses are left wondering when stability will return to the British politics and, vitally, the UK economy. This anxiety was reflected in a drop in small business confidence for the first time in four years, as recorded by the Federation of Small Business’s third quarter Small Business Index. It’s not surprising firms are keen to find any reason for hope when confronted with all this ongoing uncertainty.

Bank referral boost

November did bring a fillip for SMEs in the form of the bank referral scheme, which finally launched after two years of preparation. Companies rejected for lending by their banks will now be mandatorily referred to alternative providers, increasing their chance of finding appropriate funding. It is a step towards levelling the playing field for new entrants to the business finance arena, such as challenger banks, fintech platforms, and innovative short-term lenders like Boost Capital. But it should also inform many more business owners of the range of new finance options available to them. Roughly 100,000 SMEs are declined for bank loans annually, according to the British Bankers Association, so the impact of the initiative should be considerable for the small business community.

It has been another great year for alternative finance, with asset-backed forms of altfi hitting a record high of £4.3 billion in the third quarter. Peer-to-peer lending continued to grow, with a predicted worth of more than £5 billion by 2018, up from less than half a billion in 2013. The UK online altfi industry still overwhelmingly dominates Europe, growing by 84 per cent year-on-year in 2015, and experiencing similarly robust growth in 2016.

The Competitions and Markets Authority (CMA) recommended in its report into retail banking that new technology-driven funders should be helped to reach small businesses seeking capital through such means as online comparison tools. These platforms are increasingly common, and should have their profile raised by the referral scheme, which uses them to match small firms and funders. But the CMA report also criticised banks’ support for their small business customers. Nevertheless, 2016 saw the banking institutions beginning to change, getting more involved in the alternative lending sphere by buying up loan books, providing finance, or entering partnerships with existing providers. SMEs should be cheered that business funding is evolving, and not before time.

Bureaucratic burden

However, red tape remained a persistent headache for companies in 2016. Thousands of small firms reached the staging date at which they must introduce pensions auto-enrolment schemes. This legal requirement to provide workplace pensions for employees brings with it huge hassle, and no small amount of extra cost. Many firms have expressed confusion about how the regulations work, and a worrying number are already falling foul of the pensions regulator, being issued with fines for failing to address their obligations.

Then, the beginning of April brought the introduction of the National Living Wage, paying staff over the age of 25 at least £7.20 an hour. This has caused great problems for enterprises employing high levels of unskilled workers, such as those in the hospitality, retail, and care home industries. Many firms have complained of difficulties filling the financial shortfall resulting from higher wage bills, with a good proportion turning to bridging finance to ease the transition to the new pay regime.
Those who hoped promises made in March’s Budget to continue slashing regulation for companies would have been disappointed by the post-Brexit vote Government’s Autumn Statement in November, which offered no such reassurances. With politicians preoccupied with the machinations of Britain’s divorce from the EU, small business concerns appear to have fallen some way down the list of official priorities.

Silver linings

Yet, there are still reasons for hope. Trump’s election as US president may have been the last big shock of 2016, but it could yet result in a favourable Anglo-American trade deal for SMEs on this side of the Atlantic. The UK Government launched the Great.gov.uk platform in November to help British small firms explore their exporting options, and it has committed to do all it can to aid those selling into foreign markets. And, for all the unknown elements swirling around Brexit and the economy, small business owners aren’t likely to see the drying up of available finance that happened in 2008’s downturn. Alternative finance is alive, well, and ready to lend to companies that are keen to grow in the months and years ahead.
The last year will have left its mark on many businesses, and there may be further surprises ahead. But there are opportunities, too, and support available for those who want to exploit them. So, keep cool going into 2017, maintain business as usual, but also consider how you might do things better. With hard work and imagination, the year ahead may be far better than you think.

Alex Littner is the managing director of Boost Capital.

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.