It’s been two years since the Bank of England (BOE) launched the Funding for Lending scheme (FLS) – back when it was portrayed as an innovation that would boost the number of mortgage loans and funding given to small and medium enterprises (SMEs).
Following the severe credit crunch and international banking crisis, it was welcomed as a way of bolstering the UK economy and, hopefully, getting it back on track. However, in retrospect, we now know that this scheme was ultimately a failure.
Soon after its launch it became apparent that, while mortgage loans were on the up and benefitting from the scheme, SMEs were on the losing end. As a result, the BOE announced that was extending the scheme until January 2015 (from 2014) but would no longer cover mortgages and would instead solely focus on boosting business loans. It also further incentivised the initiative – banks were allowed to draw £5 for every £1 of net-lending to SMEs.
But despite this incentivised ‘re-focus’, SME lending has continued to fall. The latest BOE figures show that the first quarter of 2014 saw net lending at -£2.7 billion. While larger firms face little challenges in securing finance, young and fast-growing start-ups, which were the reason for creating the FLS in the first place, are still struggling. So, despite the scheme’s best intentions, most SMEs are left no better off from it.
There are a number of theories as to why the scheme has failed, including that banks didn’t publicise the initiative enough; that most high street banks think lending sums of less than £50,000 is not economically viable, and that small business are too risky to lend to. But what each of these have in common is that SMEs have to go through a complicated application process and are then effectively at the mercy of a bank’s decision. And that just shouldn’t be the case.
To resolve the lack of SME finance, we are now seeing new initiatives emerge such as the British Business Bank and alternative lenders like Metro Bank – but how can SMEs be guaranteed these will work?
These initiatives still rely on SMEs applying for solutions and could again lead to a lack of lending thanks to complex procedures. However, there is a silver lining. Recent figures show that crowdfunding and peer-to-peer lending amongst SMEs are on the up, as more and more companies seek simple and quick access to finance. And based on the failure of the FLS, it makes sense for them to seek non-bank alternatives.
But this want for simplistic finance is all part of a much bigger need for fluidness within business. Despite all of our technological advancements, businesses are still struggling to collaborate with one another. It’s not enterprises bearing the brunt of this problem – this lack of connectivity often leads to SMEs being seriously hurt by late payments and a shortage of cash flow. The latest research from Bacs found that SMEs are owed £39.4 billion in late payments and one in four admitted that, if the amount they are owed grew to £50,000, it would be enough to send them into bankruptcy.
Based on the failure of the FLS, it makes sense for SMEs to look to non-bank finance options such as peer-to-peer lending in gaining the cash they need without the red tape. However, they need to remember that improving collaboration with their larger counterparts is also essential.
Forming partnerships with larger organisations is an important goal for any SME looking to grow. Unfortunately, as the late payment issues indicate, they often find themselves imprisoned by inflexible systems which their significantly larger partners adhere to.
SMEs should also look to access cash through the numerous business networks which can now offer fast and aggressively priced funding. These also have the benefit of connecting them on one platform with larger companies, which removes barriers to business and facilitates better communication.
Not only will this enable them to get the funding they need and get paid quicker, but they can also create apps to improve processes, transact faster and more efficiently and discover new partners and customers along the way. This will ultimately boost collaboration, increase revenues and improve business bottom line.
