25/06/2015
By Chris Maule, CEO and founder of UK Bond Network
David Cameron recently revealed that there is a £1 billion gap between the total funding UK businesses receive and the amount they need to realise their ambitions for growth. Here I will investigate the reasons for this, and the benefits to UK companies and the wider economy of bridging the funding gap.
Firms with a turnover of £10 to £100 million represent just 1% of UK companies, yet make up 22% of revenue and account for 16% of employment. More than just a statistic, this demonstrates the huge untapped potential of 99% of small to medium sized businesses in the UK, and the positive impact they could have on the economy if they were not hampered by the lack of available funding.
John Cridland, director general of the CBI, has called on the government to mind the ‘financial gap’ experienced by many mid-cap UK businesses. Without due support, Cridland states that these “job creating dynamos of the economy will suffer”. Of course, it is not only these firms that will feel the pinch, but the wider British economy also. Bank of England officials have attributed Britain’s slow recovery from the financial crisis and ongoing weak productivity, at least in part, to this funding challenge, as entrepreneurs find it hard to start new businesses and re-equip existing ones.
While the government has made steps to alleviate the problem with initiatives such as the Funding for Lending scheme, a significant question mark hangs over the effectiveness of this. In 2014, net small and medium-sized enterprise (SME) lending by banks using the scheme fell by an average of £500 million a quarter, as repayments persistently exceeded new loans. While the first quarter of 2015 has seen the banks react to criticism, extending an extra £600 million in credit to small businesses, the British Chamber of commerce has said that more still needs to be done. Indeed this is a point echoed by our own survey of UK SMEs, which revealed that 38% believe that their growth is being hampered by insufficient access to funds.
Expansion is the biggest driver for SMEs seeking finance, followed by working capital – which is a more significant issue for companies with smaller revenues. Our research found that 24% of small business owners raise funds for working capital, compared to just 17% of business with revenue exceeding £1.1 million. Companies with smaller revenues are also more likely to use external funding to purchase assets, suggesting that for these businesses, securing finance is vital for continuing, as well as expanding, operations.
How is alternative finance shifting the funding landscape?
Of the SMEs we surveyed, 50% said that alternative finance is changing the face of funding, opening up a much needed artery to finance, bringing new opportunities and democratising access. Among companies with annual revenue of over £1.1 million, that figure rises to 74%. This indicates that alternative finance platforms are stepping into the gap left by traditional lenders to offer simpler and more flexible ways for companies to raise the capital that they need.
With this being the case, it is unsurprising that the alternative finance sector is going from strength to strength. Research conducted by Cambridge University and EY has revealed that the alternative finance market in the UK is now the largest in Europe. In 2014, the amount raised by peer to peer business lending increased by 200% on 2013’s figures, taking the UK market to £1.78 billion.
What are the barriers to wider take-up?
With the majority of peer to peer platforms targeted at the smaller end of the SME spectrum, typically offering up to £1 million of debt finance, it’s fair to say that micro and small businesses have strong potential to secure the finance they need. But for the companies at the upper end of the SME spectrum, the options are less plentiful. Indeed, this was a point emphasised by the Bank of England’s Trends in Lending report. Published in April, this revealed that while demand for credit from small businesses is declining, demand from medium sized businesses continues to increase.
What is more frustrating is that larger businesses are conscious of, and open to alternative finance. In comparison to smaller SMEs, our research indicates that 85% of businesses with revenue over £1.1 million are aware of alternative finance and 94% would consider using it. This indicates that there’s clearly an appetite for alternative finance among larger SMEs – which it’s now down to the industry to meet.
How can these barriers be overcome?
What is clear is that the financial services sector is undergoing radical change. Survey respondents said that they are most likely to approach an accountant or professional advisor first to discuss raising finance, making it imperative that these consultants are aware of, and understand the value of alternative finance options. Encouragingly, 15% of respondents said that they first heard about alternative finance through consultant sources, suggesting that there is already awareness among these professionals that could be built on. Government legislation compelling banks to refer SMEs who are rejected for loans to alternative finance providers, is also likely to increase awareness and drive take-up.
Financial decision makers of businesses with a revenue of £1 million and under are ten times more likely to have first come across alternative finance through friends or family (10%) than those with a bigger revenue (1%). This suggests that there is opening here for alternative finance providers to develop awareness within SME communities, such as Chambers of Commerce, which could boost pick-up by word-of-mouth among SME business owners. This will help us take another step towards conquering the SME funding challenge and delivering sustainable economic growth in the UK.
