Alternative finance has, in many respects, had a good last few years. Word began to spread more widely about the good work being done by us and our peers. Brokers facilitated record levels of borrowing for SMEs through non-traditional routes and even politicians acknowledged the growing presence and relevance of our industry. With George Osborne’s announcement on the referral system, allowing small firms rejected for bank lending to be introduced to funders who want to do business with them.
But, for all of the progress we made in the past few years, there’s still a long way to go. To employ a metaphor, we’ve reached the foothills of the mountain, but there’s still a huge ascent ahead. Too many small business owners have yet to hear about alternative lenders. Too few believe non-traditional banking finance isn’t risky. It’s a point I’ve made repeatedly in the past, but the evidence really speaks for itself. Just 44 per cent of SMEs are aware of alternative finance, according to a recent in-depth study by the innovation charity Nesta and the University of Cambridge. A mere nine per cent of smaller businesses have used, or tried to use alternative finance. That’s still an unacceptably low level of recognition, and one that we need to address urgently if we hope to do business with these ambitious, deserving, but currently frustrated firms.
This brings me back to the broker networks. As I’ve commented before, commercial finance intermediaries are akin to the gatekeepers of the small business community. They already have strong relationships with business owners, have won their trust through previous successful financing deals, and they intimately understand the specific needs of enterprises in different sectors, geographies, and of varying sizes. That type of knowledge is invaluable, however, it’s still under-exploited.
Brokers should be on a mission to educate in the year ahead and without sounding patronising, we must start by educating the educators. The broking community needs to understand better what we – and other funders in the alternative space – do, how we operate differently, and what makes us really tick. On occasion, it can take me several conversations with a broker before they truly ‘get’ what Boost Capital is all about. Short-term, unsecured borrowing is something that’s still new in the UK small business lending arena. Understandably, some are initially wary of such an unfamiliar product, and it takes some explanation, and reassurance to ensure it’s genuinely understood.
Alternative finance also includes a raft of funders that work to different models, yet tend to get lumped together. We speak as one to make ourselves heard against the larger players, but an asset financier is, of course, a very different beast to a peer-to-peer platform, which varies again from what we’re doing as a short-term lender. But what we all have in common is a degree of innovation that’s lacking in the clearing banks. Plus, we’re unified in a clear desire to disrupt the increasingly outdated funding model employed by banks when dealing with small firms.
I realise we all have a responsibility here. Boost Capital – and the rest of the alternative finance industry – perhaps hasn’t done a good enough job of articulating what we’re about – both individually and collectively. We should be able to explain more clearly how we operate differently from conventional lenders, and why we might be a preferable option. Once brokers really grasp what the different elements of alternative finance can achieve, they can tackle the second stage of the education process – spreading the word to their small business clients.
The good news is that once we reach a small firm, the chances are they’ll do business with us again. Our own experience at Boost Capital has been that seven out of ten clients come back for a second or third tranche of borrowing. Further still, the recent Nesta and University of Cambridge report indicated 86 per cent of companies that used alternative finance said they would likely approach an alternative lender first in future, even if their bank offered funding on similar terms. This is a great endorsement, and a clear sign our innovative industry is providing something smaller companies want, and need, in a form they really like.
However, the flipside is that those that haven’t worked with alternative finance remain fearful of these new forms of business funding. Six out of ten people say they’re unlikely to start using alternative finance because they perceive it as risky, according to the Nesta/Cambridge survey. Traditional banks are still regarded as being the ‘safe’ option, even while they flagrantly neglect SMEs with a continued lack of funding.
Working with brokers will be a major focus for Boost in 2018. As said, I believe they’re the key to reaching the small and medium businesses of Britain, debunking myths about alternative finance, allaying fear of it, and reiterating the message that funding exists for companies with an appetite for growth. Our industry should do more to educate the brokers, who in turn must work harder to tell SMEs about non-banking options when seeking capital. Together, we really can make this year the one where alternative finance moves firmly into the mainstream, where it deserves to be.
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