In the course of my work, I’m sometimes asked whether small businesses turn to alternative finance simply because they must, rather than out of genuine preference. In other words, do people come to us grudgingly, or do they make a positive choice to do business with us? Not surprisingly, the question often comes from a person who is more familiar or comfortable with traditional lenders. And I’m glad to be able to paint a rosier picture for them of how the alternative finance industry really works.
Of course, it is true that the banks have been less free with their capital when dealing with SMEs in recent years. But the assertion that small and medium companies are coming to us and others in our industry solely out of necessity rather than choice is one with which I take issue. For starters, this argument vastly underestimates and patronises business owners who tell us they’re pleased to discover a greater mix of commercial finance is available to them. The enterprises we work with recognise that innovation is taking place in the area of small business funding, and often actively choose a different route to investment. About four out of ten small firms say that they believe that sources of capital other than the banks will be the future for small business finance.
What the critics of alternative finance fail to realise is that while Boost Capital and our peers have started out on the fringes of business lending, alternative lenders still fulfil mainstream needs. Yes, SMEs may have been complacent in the past when bank finance was more readily available. Since the economic downturn cut many lines of funding, more firms have been prompted to seek out money elsewhere. But I would argue that our industry is rapidly maturing and becoming part of the mainstream – albeit still on a small scale compared with our huge peers. We’re providing increasingly discriminating and savvy small enterprises with the types of funding they say they want and need. Meanwhile, the big banks continue on as they always have, and remain stubbornly closed for business to many small firms.
No one can deny that alternative finance is on the rise. In the 12 months to June 2014, £12.7 billion worth of borrowing was organised for SMEs by members of the National Association of Finance Brokers (NACFB) – a 20 per cent increase on the year before. This included a significant proportion of alternative funding. But the NACFB research also revealed that too few SMEs know that there are alternative sources of funding available other than their banks. And not enough business owners realise that independent brokers can help them to find a variety of lenders well-placed to serve their particular needs.
It’s a message that I keep repeating, but it is fundamental to improve the flow of capital to Britain’s SMEs, and to the continued development of the alternative finance industry. We need to educate small and medium companies about the financing opportunities beyond the Big Four banks. The recent promise of forcing an introduction between borrowers and alternative lenders should help. The Government announced earlier this summer that banks will be made to refer lenders they reject for borrowing to alternative finance providers. Far from being a strong-arm tactic, I believe that this is a progressive move, and I’ve spoken about the urgent need for action to be taken on it as soon as possible. The idea of compelling banks to refer SMEs to other sources of lending has even made ripples across the Atlantic, causing some US commentators to call for a similar approach there. Legislation may seem an extreme way to push more SMEs in the direction of alternative funders, but without it little will change. And my guess is that most businesses will be grateful for the nudge.
I would argue that it really doesn’t matter how business owners find their way to our door – or those of other funders in our industry. Some of our SME customers fall into the growing category of informed borrowers who have researched all of the available options. Others have looked for alternatives once the bank has refused their loan applications. But their needs remain the same: gaining access to finance quickly to maintain a smooth and productive business operation, and to achieve their growth ambitions. What matters is that they know the options available to them. Once an introduction is made and we work with a business, the vast majority like what we do, and come back for further tranches of lending. If that isn’t evidence of genuine preference, then I don’t know what is.
Word is slowly getting out that there are new players in the lending arena who are offering small firms something new and attractive. Greater flexibility. A degree of innovation in processes and practices. In many cases, an all-round better deal. As more businesses learn about these potential choices, I believe that more will opt for alternative lenders. Not because they have to, but because they understand what’s on offer, and they genuinely prefer it.
Image courtesy of Serge Bertasius Photography / FreeDigitalPhotos.net