24/01/2012

By James Meekings, Co-Founder At Funding Circle

It might seem strange to say this but in the end, there might actually be some good that comes out of the global recession.

For far too long the ability to access finance for UK small businesses has been a lengthy and painful process. This has reached such a level, that lending or, more accurately, the lack of it has become one of the most topical business stories of the past 18 months.

What began with the introduction of Project Merlin targets, and was followed up by the Chancellor’s Credit Easing announcement in his Autumn Statement, has rapidly descended into a perennial and unsolvable dichotomy: the banks claim a lack of demand; while businesses beg for more support.

Crudely, this dichotomy exists because small businesses have previously had little alternative other than to seek finance via the traditional methods. The lending environment that currently exists suffers from a lack of diversity and competition. The top five high street banks contribute over 90% of all lending to small and medium sized businesses.

Coupled with this, the processes the banks use are outdated and time-consuming. It can take up to three months for businesses to be approved for a bank loan and rarely do bank managers ever understand the complexities of every business they see. Even if a bank can supply finance the terms are often restrictive and inflexible.

As a result of this, there has been no motivation to tailor products to customers’ needs, turning off many small business owners from even bothering to start the application process. The problem is not a lack of demand for finance; it’s a lack of demand for bank finance. After all, where else can a business go?

Some will assume this impasse will rumble on for years to come, however, it is worth looking to the music industry as an example of the positive impact innovative thinking can have. In less than a decade, players, such as Napster, Spotify and Last.fm have redesigned their industry, providing new and radical products that better suit the needs of customers. It is quite a statement, but these types of businesses are threatening to permanently retire the tired, old behemoths of Sony, EMI and others.

The nature of the financial services industry may not be as glamorous or revolutionary as the music industry, but there are an increasing number of new players attempting to redraw traditional boundaries, and replace old, outdated processes with new and innovative services.

We have already seen the introduction of new banks to the high street which should, over time, provide greater competition and offer far greater choice for businesses.

A small business bond market has been suggested, with the government buying up banks’ loan portfolios and financing these by issuing securities. It remains to be seen whether this would appeal to small businesses in reality – the lack of flexibility involved in every deal does appear to lessen the attractiveness – but it is at least encouraging that alternative options are being put forward.

Another example, which sidesteps the banks completely, and provides finance to small businesses in a fast and convenient way, is crowd funding or peer-to-peer lending. This works by individual investors lending directly to creditworthy small businesses.

The industry is growing at a considerable rate. Since Funding Circle launched they’ve helped individuals lend £21 million to more than 500 small businesses in the UK, and at present they’re lending more than £1 million per week. And they’re not alone. Others, such as Seedrs and Crowdcube are also using the crowd funding mechanism to offer alternative propositions.

The reason this offer is proving popular is because it has been built with the customer in mind. Small businesses want access to quick, low cost, convenient finance; and a transparent fee and charging structure. Banks can’t (or at the moment won’t) provide this, which has led to the emergence of new and innovative businesses. It’s no surprise a recent survey conducted by Huddlebuy.co.uk found that 65% of small business owners said they will seek alternative funding measures for their business in 2012.

"Clearly there will always be a role for high street banks but the squeeze on finance cannot be solved by the banks alone" - Antony Jenkins, CEO of Barclays Retail Bank, admitted as much himself recently.

There are now alternatives that offer customers genuine choice, with products built with them in mind. These should be embraced. The last few years have been a painful one for small businesses; with the right support, the next few can be more optimistic.


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