Two days ago, Virgin Money announced it would defe plans to launch into the small business and unsecured lending markets because of post-Brexit economic uncertainty.
Jayne-Anne Gadhia, chief executive of Virgin Money stressed it was a “timing point rather than anything else”, but for UK’s SMEs, timing is everything.
Successive studies from the Office of National Statistics reveal only 40 to 45 per cent of startups survive beyond their fifth birthday. Typical figures suggest that around 80 to 90 per cent of small businesses fail because of poor cash flow, either stemming for systemic late payment from customers that inevitably trickle down the supply chain, or from a lack of quick access to finance.
Growth businesses often need a fair amount of liquidity, according to Conrad Ford, chief executive of alternative finance platform Funding Options, whether it’s to replace a key piece of equipment or to take advantage of a new business opportunity. Considering the long lead times for a traditional bank loan, this may put millions of SMEs in the red.
“In the most part, traditional lenders just aren’t set-up to deal with lending in the very short term, and indeed are often suspicious of what they see as an unexpected need for cash,” Ford says.
Using technology to their advantage, alternative lenders are often faster and intuitive when it comes to meeting SME customers’ needs. Funding Options holds a seven-hour record for shortest time for finding finance, from the enquiry to the funds being available in the customer’s account.
“Although it’s not a great idea to leave it to the last moment, there are some finance products that are available in hours – for example Merchant Cash Advances, if you receive payment via a card terminal, or some forms of invoice finance if you invoice your customers. Other types of business finance are available in days – such as working capital or revenue loans or asset finance,’ he explains.
“The great news is that if you’re a viable, growing business, there are plenty of alternative lenders who may be able to help you.”
Funding and the productivity puzzle
UK’s productivity output has long been a cause for concern, and recent ONS figures show that Britain’s productivity gap, compared with other leading economies, is the largest it has been since records began in the early nineties. In fact, output per hour worked in the UK was 18 per cent below the average for the remaining six members of the G7 group of industrial nations in two years ago, and experts fear not much has changed since then.
GLI Finance’s Louise Beaumont fears the Brexit vote and following climate of uncertainty may be the cause for stalls in productivity, which is a confidence issue that liquidity may solve. “One part of the solution to the problem lies in ensuring SMEs in the UK have the access to finance they need in order to survive and grow. Such businesses have been starved of credit from banks in recent years and the IMF has estimated that a lack of funding could be responsible for as much as a 0.4 per cent decline in UK productivity,” she says.
According to Beaumont, in the absence of widespread support from traditional lenders, the alternative finance sector can play a greater role in providing this access. “Government, regulators and industry must continue their work to drive greater awareness of alternative finance as by doing so, they will contribute to solving our productivity puzzle.”
Banks and SMEs: a love-hate relationship?
For James Sherwin Smith, CEO of alternative finance provider, Growth Street, it’s apparent that businesses are not receiving the financial support they need from banks.
“Business overdraft lending by banks is down 50 per cent in four years. Many businesses have resorted to holding deposits to survive dips in cash flow. This in itself is concerning, as businesses cannot reinvest profits, reducing growth and levels of employment. Negative interest rates only add insult to injury,” he said, commenting on yesterday’s news that RBS and NatWest may start charging business customers interest for accounts with positive balances.
“This news further highlights the need for a competitive and wholly diversified business finance sector. The Government must ensure that it supports alternative providers so that SMEs are not reliant on large banks,” he explains.
According to the Institute of Chartered Accountants in England and Wales (ICAEW), banks are well within their rights to charge interest on credit accounts, so the onus to prepare is on businesses. “The danger is that this could have a distorting effect by incentivising customers not to keep their money in the bank –either prompting unwarranted spending or causing them to store money in ways that are less safe,” Clive Lewis, ICAEW head of enterprise says.
Research from accounting firm, Kingston Smith reveals a communication gap between lenders and SMEs which has propped up barriers to lending over the years. Paul Samrah, partner at the firm, explains that the disconnect is largely between the understanding that banks and entrepreneurs have about one another’s needs and processes.
“For example, many entrepreneurs appeared unaware of banks’ lending criteria, and the need to have a good credit rating and a realistic business plan. Meanwhile, the feedback and support that banks offer entrepreneurs following their loan decision is often unclear and inadequate,” he says. “Bankers often don’t have the knowledge or experience to actually help businesses. Clearly, this mutual lack of understanding can result in significant barriers to SME lending.”
Challenger banks tend to find a middle ground between the structure and security of traditional lending and the personal relationship building of which alternative lenders seem to have a grasp. Operating on a more case-by-case basis, challenger banks assess the individual needs of a business and often can provide the helping hand business really need through being more flexible.
“It’s probably fair to say there’s a general lack of understanding of what a bank’s process is. I think banks need to be clearer when they talk to customers about lending processes,” according to David Hayers, head of growth finance at Clydesdale and Yorkshire Bank, in response to the assertion that banks and businesses face a communication gap.
“We nearly always get asked about processes and timelines in a first meeting with a company, and even though we talk management teams through the estimated timeframe, any deal timetable is subject to change depending on a wide range of factors such as management’s capacity to provide the necessary information a lender will require, the accuracy of that information, how complex the business is, capacity factors at the lender, any external diligence requirements etc,” he explains.
Growth Finance at Clydesdale and Yorkshire Bank includes deals upwards of £250,000 to £10 million, which can explain longer lead times, says Hayers. “The completion of raising money depends on the quantity and accuracy of the information customers share. Sometimes this information is contradictory, or is not in the right format. Lenders need to be clear about what is required and, importantly, communicate any delays to the expected timetable. That said, it takes time to get to know your customers.”
While the minimum loan amount for the growth finance team at Clydesdale and Yorkshire Bank is £250,000, Hayers explains that smaller loans, at the sub £50,000 level for instance, is determined by more of a credit scoring approach, which is often much quicker as the specifics of the company are assessed against a set of criteria and the company’s request is either approved or not.
“That doesn’t necessarily mean the lender will have a deep understanding of the business, and if it is more of a short term loan, or for a specific asset, that may be fine. However, if a business wants to grow substantially and wants a lender to help fund that growth, then the better a lender understands the business, the more appropriate and tailored the debt structure provided should be. Such a level of understanding is built up over weeks and months, not hours and days.”