By Christian Lanng, CEO, Tradeshift
Last year banks were in the news for all the wrong reasons. According to reports the state owned banking giant, RBS, had been making vast profits at the expense of vulnerable SMEs; its effort to reduce risky loans has nudged previously solvent companies out of business. Compounding this, RBS’ lending to small businesses has withered by £17billion since it was salvaged by the taxpayer in 2008, according to a report by Sir Andrew Large, former deputy governor of the Bank of England. It’s becoming ever more clear that the traditional methods just aren’t working. So where can SMEs turn if they need to fund the growth that will fuel the economic recovery?
The fact is, while the RBS situation sounds extreme, it’s not all together surprising that the banks are making financing for SMEs difficult. It’s pretty much the most capital-heavy lending a bank can deliver, and as a result it’s just about riskiest. Regulators are demanding ever higher capital ratios, meaning the capital required for SME lending has to tally with this, making banks modify their lending behaviour.
So, what about the Funding for Lending scheme, which was launched with much fanfare as an easier way for SMEs to access cash? We heard from Vince Cable that that the Funding for Lending Scheme appears to have boosted lending… but for mortgages, not SMEs!
The Enterprise Finance Guarantee also appeared to offer some hope. It was reported that through this scheme, banks offered loans worth £111m to SMEs in the third quarter of 2013 – the most since 2010. Yet, to be eligible for the funding, the banks that supply it need still need to see historic accounts or audited accounts. Which if you’re a very young company, you won’t have. And if you need the money fast, it still doesn’t work.
One option to for funding on invoices is factoring. However this process can still be restrictive – for many businesses, the fees and interest rates mean it is not always a viable option.
The situation is so bad that we’ve had reports that some SME owners are committing to outrageous interest levels through Wonga.com to tide themselves over.
The truth is that this whole process is fundamentally flawed; it is stunting British business and is stalling growth. Dissenters on this topic are growing ever louder, indeed the RBS story saw a number of opinions on a remedy surface with some saying regulation on the capital required by banks for lending should be revisited.
However, and as is often the case, it is within a broken landscape that unlikely remedies form. We are starting to see very new, genuinely innovative funding solutions begin to disrupt the tired, archaic financial institutions that have dominated the lending market for decades.
Businesses are becoming more social. Almost all of us are connected in our personal lives by social media, and many businesses are starting to understand the power of the network. Since setting up Tradeshift three years ago, we’ve signed up hundreds of thousands of businesses in 190 countries.
And just as Facebook makes use of the huge amount of data flowing around its data, there’s a massive potential for lenders (banks and non-banks) to use that data on business networks to make much smarter lending decisions. As they do so, we will see lending issues reduce as audit information and understanding of creditworthiness are all replaced by proof of past transactions and evidence stored within the network.
For example, CapitalAid recently launched a £3bn fund that floods the invoicing process with cash. It works like factoring in that it’s based on invoices, but it’s a world away in the speed the funds can be accessed, and the aggressive pricing that lenders can offer, based on data in the network.
This is a crucial issue that we have to fix, as lack of SME funding does not only affects SMEs. The fact is that the private sector needs to make sure SMEs have a ready supply of cash to grow and thrive, as when SMEs suffer – so do the big businesses they work with. It is in the best interests of any buying organisation to ensure their supply chain has the financial resources needed to succeed. In turn, this scheme also means more stable, cash solvent supply chains for enterprise customers.
It’s clear the traditional finance methods aren’t working, and we will continue to see headlines lamenting the lack of support for SMEs and the broken processes favoured by the banks. However change is genuinely afoot as businesses begin to link together to disrupt the old ways of doing things and find alternative funding methods to fuel growth.