29/08/2014

By Russell Gould, Managing Director, Everline

Gaining access to finance is a well-reported struggle for SMEs. When seeking finance, most small businesses in the current market will automatically approach their bank, but the process can be time consuming and the rejection rate is around 50%[1]. Such a confined lending market is problematic when considering that more than a quarter of SMEs say lack of access to cash is restricting business growth[2].

The Bank of England recently reported that small businesses’ demand for finance grew in the first quarter of this year. Its Trends in Lending Report[3], however, showed that lending has fallen across the board. Meanwhile, research from digital lender Everline showed that more than half of SMEs do not believe traditional finance providers are interested in lending to them[4].

Small businesses have the potential to drive growth and employment in the UK but are hampered not only by a lack of finance but also a lack of confidence to try to access the working capital they need. Although there is a growing number of alternative finance providers that may be willing to lend, and which might also offer more suitable products, business owners often aren’t even aware of their existence.

SMEs need support to increase their knowledge of alternative finance providers outside of just traditional banks. This should ultimately improve the supply of cash flow to viable small businesses who need additional working capital to aid growth, fill a cash gap or take advantage of a market opportunity.

What needs to be done to improve SME access to finance?

Whilst there is clearly significant demand for SME credit, to date the market has been dominated by the banks, whose products may not be adequately tailored to the specific requirements of small businesses. Particularly problematic are short-term cash flow needs, which demand a level of control and flexibility around speed of access and repayment timeframes which simply isn’t available from traditional lenders.

One potential game-changer is the recently announced Small Business, Enterprise and Employment Bill which builds on a Treasury consultation launched earlier this year. In a recent speech, the Chancellor outlined legislative action as part of the Bill which will help match SMEs rejected for funding from their bank with alternative finance providers.

New proposals under the Bill will also require banks to share small business data with alternative finance providers. These measures should help to direct businesses to a greater range of funding solutions, making the SME lending market much more competitive and improving opportunities for growth. It will also allow alternative lenders to open up funding to more viable businesses by providing valuable data that will aid responsible lending decisions.

Overall, the creation of a mandatory process to help match SMEs seeking finance with a wider range of lenders will be hugely beneficial for small businesses and the UK economy. However, alternative lenders shouldn’t just be viewed as a last resort for SMEs who have already been rejected by the banks. This is far from the case in reality, and a much more effective system would be allowing SMEs to easily access all their funding options up front so they can find the solution best suited to them and their funding needs.

The fact the Government recognises a need for change in small business lending is a positive step forward.

How can SMEs take advantage of emerging funding platforms?

Due to the diversity of SMEs in the market, data is a key factor in assessing risk when lending. It is encouraging to see that the Government is considering options to improve access to SME credit data for non-traditional providers. The increased availability of business data will help digital lenders such as Everline to continue to make responsible lending decisions.

SME lending is a far broader landscape than just business bank loans. It could include overdrafts, online working capital options, peer-to-peer funding, invoice factoring, and merchant cash advance among others. We’d recommend that SMEs consider making their credit application data accessible through funding platforms as it will allow them to easily access the best finance option for their business, across a wide range of products. Additionally, data on rejected applications for finance could enable alternative credit providers to fill in the gaps and tailor their finance offering to an individual business.

In conclusion:

Banks have enjoyed a monopoly on small business lending without keeping on top of what today’s SMEs need and want. The reality is that hard working small businesses need fast and flexible finance, and banks are simply not built to provide this sort of funding. It is therefore important that emerging lenders be given the opportunity to step in.

Funding platforms with a mandatory process for sharing credit provider and SME data could be used to offer financial options that may be more suitable for SMEs’ needs. Most importantly however, it would open up the market and give small business owners better control over their finances and how they access funding.

Russell Gould is Managing Director of Everline, the digital lender for SMEs. Everline provides a flexible and convenient source of funding to small businesses and sole traders looking to expand, manage working capital, or fill a cash gap.

[1]Gov.co.uk HM Treasury consultation on SME finance: help to match SMEs rejected for finance with alternative lenders
[2]Independent research conducted for Everline by ICM with 509 UK small business owners/decision makers in companies with 1 – 49 employees, including 155 sole-traders between 18 – 23 September 2013. ICM is a member of the British Polling Council and abides by its rules
[3]Bank of England Trends in lending April 2014
[4]Independent research conducted for Everline by ICM with 509 UK small business owners/decision makers in companies with 1 – 49 employees, including 155 sole-traders between 18 – 23 September 2013. ICM is a member of the British Polling Council and abides by its rules

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