By Tim Evans, Strategy and brand director, Verus360
The business finance forecast has looked gloomy for small and medium-sized enterprises (SMEs) since the financial crisis of 2008, with traditional institutions remaining reluctant to lend. However, thanks to a surge in adoption of technological solutions, the outlook seems brighter.
Recent research suggests UK businesses’ use of cloud computing has leapt 75% in the past five years, with 84% of organisations now taking advantage of the technology.
For SMEs, this is part of a revolutionary sea change in how tech is enabling business. As they become increasingly comfortable with using mobile apps to connect with customers, more SMEs are processing transactions using cloud-based tech, and moving customer engagement to social media.
The implication for finance
As companies embrace tech, there’s a huge knock-on effect for both operational finance technologies — AKA #FinTech — and business finance, with tech-savvy SMEs enjoying greater choice of, and online access to, financing options, as well as more control over specific products.
The emerging trend is for SMEs eschewing traditional, ‘one size fits all’ lenders (as banks still struggle to meet business needs post-credit crunch) in favour of alternative providers. In 2014, according to a report by innovation charity Nesta, UK SMEs gained a massive £1.74bn of funding from alternative finance (‘AltFi’) routes — the sector’s worth having doubled annually over three years.
So why is AltFi so popular with SMEs?
Firstly, it’s a lot more accessible, with streamlined online processes that make things simple for would-be clients — particularly when compared to traditional lenders’ lengthy application timescales and arduous paper trails.
Secondly, AltFi is more flexible, with SMEs able to combine different services for customised provision. A firmer focus on the customer’s needs, and less risk-averse attitudes, also mean that AltFi lenders are keener to work with businesses to create products, adapting nimbly to market demand.
Another major attraction is pricing, as online lenders’ savings on running costs are passed on to borrowers — but there’s still headway to be made. As with the old-style finance institutions, too many AltFi lenders continue to rely on an attractive headline rate to draw in custom, with an often-bamboozling array of hidden charges pushing up the overall cost.
Cutting through the fog
As well as a lack of transparency around charging, the AltFi sector needs to solve the issue of customer confusion. With a vast array of products out there, and many of them being more appropriate for some industries than others, it can be difficult for smaller businesses to select the solution that’s right for them. In fact, Nesta’s study shows that more than 40% feel unable to make an informed choice.
The future of finance looks positive, however, as the alternative market expands and diversifies, allowing SMEs to leave behind the strictures of the old-school lenders.
For the moment, the most important thing for potential borrowers to remember is that they have to do their research before signing up to any arrangement. And do it thoroughly.
Learn more about the rapidly-evolving SME finance market in Verus360’s free report: The rise of the debt-shy SME: Why business borrowing is broken — and how to fix it