In an interview with the BBC in 2014, David Cameron described small businesses as the ‘lifeblood’ of the UK economy. Whilst this has certainly popularised the term, it is one which has not only been used, but has been true for many years. According to the Department of Business, Innovation and Skills (now BEIS) SMEs accounted for 99.3% of all UK private sector businesses in 2015. This figure is undoubtable evidence of the true effect SMEs have on the UK economy, and the importance of these businesses having access to the finance they need to grow, invest and expand. In a post-Brexit world, SMEs have never been more important to keeping the UK economy afloat, but are we truly supporting them?
Is there still a place for banks to finance SMEs?
There are now more start-ups in the UK than ever before, and in order to reach a level of scale, these organisations need to finance effectively. Smaller companies can find themselves turned away from mainstream bank lenders, who do not want to lend to businesses with fewer than three years of financial statements as evidence. Similarly, larger or more experienced firms that no longer fit traditional bank lending criteria continue their struggle to source mainstream financing.
The main advantage for a business looking to traditional lenders is the familiarity and perceived stability behind a high street name. Banks still account for over 80% of lending to SMEs, yet the British Business Bank has found that approximately 100,000 finance applications from small businesses are declined by banks on an annual basis, demonstrating that bank finance is undoubtedly not the right solution for all of these businesses.
The government has acknowledged that traditional bank finance will not always be suitable for the UK’s small businesses but is only now committing to act on it. The long-awaited Bank Referral Scheme is due to be implemented in early 2017, and means that SMEs rejected by banks must be transferred to a chosen alternative lender which will give them the finance they need.
Whilst this is a step in the right direction, it still means that SMEs are going to banks in the first instance, instead of initially speaking to an alternative lender who would have quickly approved the financing of the business.
The increasing presence of alternative lenders
SMEs not only want third party financing to meet their working capital requirements, but to also assist with a variety of event-driven challenges including investment, management buyouts, expansion or acquisition. These each make up crucial parts of an SME’s lifecycle, and as such require a bespoke financing plan to suit the needs of a particular business, as opposed to an ‘off the shelf’ option from a mainstream bank.
Alternative financiers have a distinct benefit over mainstream banks, not only because of their ability to finance a number of different business sectors and models. A trusted alternative finance provider will be able to work with a business to find options to suit its immediate and long-term needs, and adapt the financing and service offered accordingly. Potential hurdles such as a lack of financial history or a poor financial performance can be discussed and considered in person, by an experienced team. This tailored service and deep sector understanding often displayed by alternative lenders can enable them to get to grips with an SME’s needs, and partner with the business to ensure its funding requirements both now, and in the future, are being met.
Despite the fact that banks have previously dominated the SME lending market, the economy is changing and with it comes a clear opportunity for alternative financers to drive growth within these businesses. It will soon be the case that alternative lenders will not be second choice to mainstream banks, but the go-to option for businesses that want professional, flexible and fast financing. The equity in the alternative finance market means these lenders have the freedom to invest in small businesses, and ultimately be the first point of call for those seeking financial support. Once this shift occurs, the industry will be, without a doubt, the heart that pumps the lifeblood of the UK economy.