By Paul Mildenstein, CEO, Liberis
Despite the rapid growth of the alternative finance sector, doubling year on year since 2012 and now funding some £1.74 billion, small businesses are still missing out on getting much needed finance.
Although larger companies are again beginning to access the finance they need, the banks aren’t lending as much as they once did to small firms, and it’s unlikely they ever will again. Latest figures by the Bank of England show that net lending to small and medium-sized businesses through the Funding for Lending Scheme was down again in the final quarter of last year with a fall of £810m. For many, especially young and new businesses, the bank door remains firmly shut and for those that do approach them, the rejection rate is estimated to be 50 per cent. A good proportion of these are actually viable and are rejected because they don’t meet the risk profiles of the largest banks.
Interestingly though, they remain the first port of call for the majority of small businesses seeking funding and a bank loan remains the most popular product choice.
It’s a worrying fact that many small business owners remain unaware that there are other funders out there willing and able to lend money. In a recent survey that we did with One Poll of 1,000 small firms, 45 per cent either didn’t understand what alternative funding was or had never heard of it. There are many other surveys too that corroborate this lack of awareness. The situation is further exasperated by the lack of research by small businesses into funding options. A British Business Bank study has revealed that 40 per cent of business owners spend under one hour researching funding and 20 per cent spend one to two hours. The average time spent choosing a holiday is nine hours!
Any small business looking for funding now is imprudent not to explore alternative funding providers. Spawned by the scarcity of bank lending, the alternative finance sector has emerged as a very credible substitute. The funding choices are wide and varied and the use of technology through online platforms is changing the way that small businesses can access capital. It’s bringing efficiencies and convenience never seen before. The alternative finance sector is to traditional funders what Amazon was to retail or Apple to Nokia.
It’s imperative that the Government’s planned system to refer rejected loan applications to alternative funders works to bring balance to the SME funding marketplace. Although announced last summer, there’s no start date yet and no information about how it will be executed. The success or failure of this scheme will be in its detail and the willingness of the banks.
In the meantime, my advice to small businesses when looking for funding is:
• Do your research – an internet search will throw up a myriad of providers and independent portals that will signpost you to the most appropriate funding for your business. www.alternativebusinessfunding.co.uk
• Become more financially literate – there’s a great deal of information online about alternative funding and how it works written by business journalists, plus some useful white papers.
• Approach alternative funders – a significant number of small businesses make no further attempt to find funding when turned down by a bank. It’s no longer an onerous task. Most have online applications that are quick and easy to complete and don’t require elaborate business plans. Furthermore, they use modern underwriting, combining innovative credit scoring and information models that analyse risk in a more relevant way and quickly.
• Use a broker – the National Association of Commercial Finance Brokers can find a broker in your area with access to a wide range of finance facilities, including alternative providers. www.findsmefinance.co.uk
• Appeal if you’re turned down for bank funding: 13 high street lenders now have ‘The Appeals Process’ set up which means that any small and medium sized business in the UK (with a turnover under £25m) has the right to appeal. www.betterbusinessfinance.co.uk/appeal