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Last December, when Parliament announced an inquiry into small and medium-sized enterprise (SME)’s access to finance since the economic downturn, many declared it long overdue. Bank lending to smaller businesses may have improved recently, but it remains far below pre-crisis levels. Alternative finance is on the rise, but there are still too many cash-starved enterprises in the UK, a situation that merits proper investigation.

But after a Business Select Committee hearing for the inquiry, where politicians quizzed small business experts, I’m less than confident a solution will result from the committee’s efforts.

Unanswered questions

Why do I take such a pessimistic view? Big topics were certainly discussed at the hearing, and important points made. But the two major barriers to capital for SMEs weren’t really tackled – how the banks can be made to change their lending behaviour, plus better exploiting the potential for alternative finance to make up more of the funding shortfall. Instead, the politicians asked a lot of questions, which were, to paraphrase the great Eric Morecambe, along the right lines, but in the wrong order.

The negative effect on small firms of a lack of bank funding can’t be underemphasised – banks still account for about 80% of small business lending. An over-reliance by the banking institutions on old-fashioned measures such as credit scoring has a part to play, as the hearing noted. New businesses, even those with great fast growth potential, can often struggle to find finance because they have no credit rating. Established companies with a less-than-perfect credit history are also profoundly disadvantaged when measured this way.

Tom McMurtie, the only business owner present at the event, rightly pointed out the injustice of this, since some businesses have poor credit records due to no fault of their own, but rather the cyclical nature of many sectors. Such situations require a more sophisticated analysis of a company, and it’s one of the reasons we at Boost Capital don’t depend on credit scores when assessing our loan applicants. But, beyond a general acknowledgement of the risk aversion of the banking establishment, fuelled by its use of unfair and out-of-date assessment methods, the committee failed to explore how banks might be encouraged to open up their loan books.

The committee also missed the opportunity to discuss whether current government attempts to stimulate bank lending to SMEs are proving effective. As I have made plain in the past, I believe there’s much more that could and should be done in official circles to increase the flow of capital to smaller firms. Unfortunately, last Wednesday, no such questions were asked.

Awareness of alternatives

However, new methods of lending were acknowledged by the committee. It was said a major attraction of the new generation of challenger banks is they offer innovative practices, such as longer opening hours, but also something old-fashioned - customer service. Eschewing a formulaic, computer-says-no approach, new business funders, including online altfi providers, are engaging with the people behind the enterprises, and taking into account their individual circumstances. As the representative from the Institute of Directors (IoD) pointed out, even if someone doesn’t get the answer they’re seeking, the fact they’ve been given a fair hearing is genuinely appreciated by most.

Nevertheless, the point was made that awareness among business owners of the increased range of funding options is still low. Those that are aware of what’s available remain wary of non-traditional forms of lending, and others are unsure where to turn for guidance on innovative sources of capital. Perhaps the Government should signpost funding possibilities for SMEs, someone suggested? But, earlier, the same speaker had highlighted the labyrinthine nature of the Department of Business, Innovation and Skills’ website, saying it was the last thing an exhausted business owner wanted to face at the end of a typical 16-hour working day. It raises the question of how effective Westminster really is at understanding and communicating with time-poor SMEs.

Improving communication

We do need the backing of the political powers-that-be to raise awareness of - and confidence in - alternative finance options, as I’ve said many times previously. ). Every time someone of the stature of George Osborne praises the efforts of the fintech sector, as he has done in the past, it lends legitimacy to our industry, an endorsement many small business owners still crave. Once SMEs better trust non-conventional funding, they’re more likely to give it a try – and those that work with us typically come back for second or third tranches of funding, a considerable recommendation in itself.

But, sadly, many politicians remain unaware of what altfi has achieved, how it works, and the ways it might help their small business constituents. Research has shown about one in three MPs has a poor understanding of crowdfunding and peer-to-peer lending – the most high-profile forms of alternative funding – while almost half of politicians have some reservations about the trustworthiness of new providers. These findings were produced in late 2014, and one hopes views have changed since, but it demonstrates that our industry still has as much work to do explaining ourselves to legislators as to the small business community itself.

Positive peer pressure

I found it heartening to hear McMurtie, an experienced business owner, say to the parliamentary panel that the advice he and other SME bosses value most is that of their peers. Our business has found word-of-mouth recommendation one of the most powerful forms of promotion possible, since business owners will always respect and trust the judgement of others who face similar challenges. The more SMEs that use and are satisfied with alternative forms of lending, the more word spreads, and more businesses benefit.

The younger generation may also be key to change. The point was made at the hearing that younger founders often have a negative attitude towards the traditional banking establishment, having grown up during the economic downturn. Yet, they also have a greater inclination to seek out and use funding alternatives. The current financial services ecosystem lags behind these younger entrepreneurs’ behaviour, serving old funding models. But, it may just be forced to adapt by changing customer demands.

Iain Wright, the chairman of the select committee, emphasised that a lack of SME funding is not a new problem - the Macmillan Gap was first identified in 1931, highlighting how Britain’s small firms lose out on necessary growth finance. Today, the difference is we’re in the middle of a real funding revolution, driven both by demand and new technology, and one that could open up a wealth of growth capital for smaller businesses. MPs should do more to free up bank funding for small businesses, but also to encourage understanding of and access to these new alternatives. How to achieve both things – and quickly – is the question politicians really should be asking.

By Alex Littner, managing director of Boost Capital