Money (9)

When looking for funding, the majority of businesses have historically looked towards the traditional high street banks to provide financial support during cashflow struggles, a period of high growth or to invest in a specific area of the business. In more recent times however, business owners are shying away from these large lenders and are looking elsewhere to manage their funding gap.

The issue of eligibility

The main advantage for a business of any size looking to traditional lenders is the familiarity and perceived stability behind a high street name. Achieving a bank loan as a small business has never been an easy task; even the Funding for Lending (FLS) scheme - previously heralded as a way of incentivising banks to boost their lending to the ‘real UK economy’ - is being slowly phased out by the Treasury and Bank of England in January 2018 after five years.

Nevertheless, banks have stepped up their lending to small businesses in recent months, with HSBC recently committing a £10bn loan chest specifically for lending to small and medium-sized enterprises (SMEs) in the UK. Whilst this fund will undoubtedly be an important resource for smaller firms looking to grow, it will not be suitable for all. Some business owners may find themselves outside of the standard eligibility criteria, and therefore turned away from HSBC and other larger lenders. According to the British Business Bank, approximately 100,000 small business finance applications are declined by banks each year, proving that it is certainly not the right solution for all SMEs.

Making alternative finance an attractive option

Finance is key to unlocking the potential of small businesses to innovate, grow and increase productivity. Small and medium-sized businesses must ensure that all possible avenues of funding are explored, in order to find the solution best suited to their individual needs. Despite the alternative finance industry being recently valued at £3.2 billion, many SMEs are still unaware of what the industry can offer, and indeed how its solutions can help their businesses. These alternative firms are providing the competition that the banking sector has historically been lacking; stepping up to the plate and responding to the growing needs of those that are still being rejected by the big banks when applying for finance.

In addition, the fintech boom in the UK is making it more difficult for the big banks to compete on service, speed and discretion. Although many are implementing greater levels of technology in order to innovate, the smaller, alternative lenders – whose products and services are rooted in technology - continue to develop much faster.

As such, banks and alternative finance providers need to work together to ensure small businesses are getting a fair ride. Banks can actually assist with this in the coming months, with the ‘Bank Referral Scheme’ being passed into law as part of the Small Business, Enterprise & Employment Act 2015. Under this scheme, SME applicants rejected by banks for funding will be offered the opportunity to be referred to designated alternative finance platforms, offering a second chance for funding support. Although this scheme has not yet started, it will certainly benefit thousands of small businesses across the country, should they wish to take part.

It is clear that borrowing from the big banks is not suitable for all SMEs. Business owners should look to all avenues of funding support in order to continue with their business growth plans, or even in the event of starting up a business altogether. The variety of options available from the alternative finance sector means that there is a perfect solution for each and every business, regardless of size or business type.

By Aamar Aslam, CEO of Funding Invoice