By Richard Prime, CEO and Co-Founder, Sonovate
Last month Vince Cable announced his latest plan to boost lending to SMEs - under the new government-backed British Business Bank, the government will take on the associated risk of lending for one ‘challenger bank.’ It’s encouraging to see the government adopting alternative measures, especially after the failure of the Funding for Lending Scheme (the concept of matched funding was never going to work when there are no funds to match in the first place). But will it make any difference?
Due to start piloting at the end of the month, Vince Cable’s scheme should be a welcome intervention — in theory banks will regain confidence in lending to small businesses, SMEs can get the funding they need to grow, and the economy will continue to pick up.
But beginning with one bank and rolling the scheme out to other banks only if it’s a success is a move so cautious even the banks would be proud of it. Start-ups are risky by nature, so Britain’s fledgling businesses are never going to be attractive propositions for the risk-averse banks (despite driving economic growth), with or without this new scheme. All this needs to change. The economy is growing, (GDP grew by 0.9% in the second quarter of 2014) and it’s time for SMEs to capitalise on this and really push for growth. But for many start-ups, they need that all important injection of cash to do so.
As the owner of a fintech start-up, I know how frustrating the banks refusal to lend can be. Despite passing due diligence repeatedly, we were refused funding by three major UK banks. We have since secured a funding line from an American bank, proving we are a solid business prospect - they simply didn’t take the time to understand our business model and the industry we operate in.
Banks continue to make lending decisions based solely on credit, and credit is one thing most start-ups don’t have. By sticking to the traditional approach, banks are stifling growth potential and adversely affecting the economy’s growth. Even when they do lend, they fail to understand the unique requirements of small businesses. They don’t offer enough flexibility to accommodate for their fast-growing nature and the information is just not available to help small businesses understand what they are getting in to. It’s not that the banks are misleading, but their off-the-shelf products that might look good on paper, are not always the most sensible option for the small business in question.
Traditional, off-the-shelf products just won’t cut it anymore. Many small businesses have already turned towards crowdfunding sites or angel investors to secure the injection of cash they need, and there’s been a rise in the number of smaller finance companies operating in particular industries with the relevant experience and sector knowledge to do so. This is the future; the tailored products these companies can offer are far more attractive to potential customers than anything the banks are able to offer because they are catered towards specific business needs.
By the time UK banks stop restricting access to funding and regain confidence in the start-up scene, they’ll have lost their place as the go-to provider of business finance. Alternative funding solutions are increasing all the time, whether in the form of crowdfunding, angel investing or new alternative finance providers, and regardless of whether more schemes like the British Business Bank or Funding for Lending are introduced, this is a trend that’s here to stay.