Author David Hugo Hargreaves Growth Guru at The Growth Hub: A family man and walker of the family dogs
David Hargreaves, Managing Director of The Growth Hub Funding, discusses the current state of the small business finance landscape and the options open to companies.
Accessing business finance is a struggle far to familiar to too many SMEs. The Bank of England recently reported that the small business demand for funding grew in the first quarter of this year, with a further increase expected in the second. Yet the BoE’s Trends in Lending Report showed that lending has fallen across the board. Meanwhile, recent research showed that more than half of small and medium-sized businesses do not believe traditional lenders are interested in lending to them.
In the current climate, most businesses will only approach larger banks when seeking business funding, even though the process can be time-consuming and the rejection rate is around 50 per cent. This is clearly a serious issue, especially when considering that more than a quarter of SMEs say a lack of access to cash is restricting business growth.
These small businesses have the potential to drive growth and employment in the UK however they are hampered by not only a lack of finance but a lack of confidence to try to access the working capital they need; more than half (51 per cent) think traditional lenders are not interested in lending to them.
Although there is a growing number of alternative finance providers such as The Growth Hub’s pension backed funding, that may be willing to lend, and might also have more suitable product solutions, business owners often are not even aware of their existence.
As a result, SMEs need support to increase their knowledge of other funding options and prevent banks 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.
What needs to be done to improve access to finance?
While there is clearly significant demand for business funding, to date the market has been dominated by the banks, whose products may not be 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.
One potential game changer is the recently announced Small Business, Enterprise and Employment Bill which builds on a Treasury consultation launched earlier this year. It proposes taking legislative action to help match SMEs rejected for funding from their bank with alternative finance providers.
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 to more and more viable businesses by providing valuable data that will aid responsible lending decisions.
Overall, the creation of a mandatory process to help match SMEs 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 SMEs 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.
The fact the government recognises a need for change in small business lending is a positive step forward.
How can businesses take advantage of emerging funding options?
Due to the diversity of 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 that is available, the better.
Small business lending is a far broader landscape than simply business bank loans. It could include overdrafts, online working capital options, pension backed funding, 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.
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.
Funding platforms with a mandatory process for sharing credit provider and SME data could be used to offer financial options that may be more suitable for SMEs’ needs. Most importantly however, it would open up the market and give small business owners better control over their finances and how they access funding.
The Growth Hub gives growing businesses full access to every funder in the UK with many being able to reduce costs to The Growth Hub clients. The Growth Hub are also able to fully support your business growth on every level.
Author David Hugo Hargreaves the Growth Guru at The Growth Hub.