Recent news from the Bank of England that net lending under the Funding for Lending scheme fell by £810m in the final quarter of last year highlights again the importance of different types of finance for small businesses.
The scheme has been branded a failure as the total decline in lending over 2014 hit £2bn. The struggle for finance has long been the biggest issue for the UK’s small businesses and one that is significantly hampering their growth plans.
Research undertaken by Everline and the Centre for Economic and Business Research (Cebr) towards the end of last year found that although small businesses have big growth plans for 2015, they are unable to carry them out due to a lack of finance and talent with the right skills.
In the current market, most SMEs will only approach larger banks when seeking finance, even though the process can be time consuming and the rejection rate is around 50%. These small businesses have the potential to drive growth and employment in the UK but are hampered by not only a lack of finance but a lack of confidence to try to access the working capital they need – over half (51%) think traditional lenders aren’t interested in lending to them.
Although there is a large number of alternative finance providers that are willing to lend, and might also have more suitable product solutions, small business owners often aren’t even aware of their existence. As a result, small businesses need support to increase their knowledge of other finance options and prevent banks always being the default choice. This should ultimately improve the supply of cash flow to viable small businesses who need additional working capital to aid growth, fill a cash gap or take advantage of a market opportunity.
How can we improve access to finance for small businesses?
There is clearly significant demand for easier access to finance for small businesses. To date, the market has been dominated by banks, whose products are often not adequately tailored to the specific requirements of small businesses. Particularly problematic are short-term cash flow needs, which demand a level of control and flexibility around speed of access and repayment timeframes which simply isn’t available from traditional lenders.
The Small Business, Enterprise and Employment Bill is a potential game changer. It proposes taking legislative action to help match SMEs rejected for funding from their bank with alternative finance providers therefore significantly opening up the market. New proposals under the Bill will also require banks to share small business data with alternative finance providers. These measures will ultimately point businesses to a greater range of funding solutions, making the SME lending market much more competitive and improving opportunities for growth. It will also allow alternative lenders to open up funding by providing valuable data that will aid responsible lending decisions.
Overall, the creation of a mandatory process to help match small businesses seeking finance with a wider range of lenders will be hugely beneficial for small businesses and the UK economy. However, alternative lenders shouldn’t just be viewed as a last resort for small businesses who have already been rejected by the banks. This is far from the case in reality, and a much more effective system would be allowing SMEs to easily access all their funding options up front so they can find the solution best suited to them and their funding need.
How can SMEs take advantage of emerging funding platforms?
Due to the diversity of small businesses in the market, data is a key ingredient to any algorithm-based approach to assessing risk when lending and so it is definitely encouraging that moves are being made by the Government to improve access to SME credit data for non-traditional providers. The more business data is available, the better the basis for digital lenders such as Everline or ezbob to continue to make responsible lending decisions, and the more supportive they can be of small businesses seeking finance.
SME lending is a far broader landscape than simply business bank loans. It could include overdrafts, online working capital options, peer-to-peer funding, invoice factoring, and merchant cash advance among others. Whether or not legislation is introduced to connect SMEs with alternative finance options, we’d recommend that SMEs seriously consider making their credit application data accessible through funding platforms as it will allow them to easily find the best finance option for their business across a wide range of products. Additionally, data on rejected applications for finance could enable alternative credit providers to fill in the gaps and tailor their finance offering to an individual business.
Looking beyond banks for small business support
Banks have enjoyed a monopoly on small business lending without keeping on top of what today’s SMEs need and want. The reality is that hard working small businesses need fast and flexible finance, and banks are simply not built to provide this sort of funding. It is therefore important that emerging lenders be given the opportunity to step in. Although the launch of the Funding for Lending scheme illustrated the Government’s commitment to small businesses, it is clear that its goals were far from reached. With the election round the corner, the new government must do more to educate small businesses about the range of alternative finance options available to them as well as pioneering new lending schemes that really meet the needs and demands of our small businesses.
Further reading on funding: Mind the SME funding gap