Just over a month ago, those of us in the alternative finance industry thought we had good reason to celebrate. The Government had finally announced its long-promised plans to force banks to pair small businesses with alternative lenders if they weren’t prepared to offer them funding themselves. We praised the move on this blog at the time, recognising it as an important step towards freeing up essential capital for Britain’s SMEs, while also giving our young industry a helping hand to expand and reach many more of these needy and deserving enterprises.
Sadly, as the weeks pass and summer fades into autumn, I can see no evidence of any material progress on this vital initiative. At the beginning of August when the new measures were announced, the encouraging words of the Chancellor, George Osborne, and Vince Cable, the Business Secretary, made these reforms to small business funding sound like an urgent priority. Then, Cable said:
“Forcing banks to refer businesses to alternative lenders is something I’ve been determined to make happen. It’s good that more SMEs are making use of alternative finance, but the big banks still dominate, and small businesses often give up if they’re turned down for finance by their bank. My ambition… is to radically alter the overall market landscape.”
He’s absolutely right to highlight the huge disparity between the share of the SME market held by the big four banking providers and that represented by smaller, often new entrants. The alternative finance industry is growing at an extraordinary rate, but don’t forget from how low a base. The reality is that we’re still very small in comparison with the established financial institutions. Alternative finance is embryonic at present, and we need all the help that we can get to punch our way into the marketplace – and into the awareness of the average small business owner seeking finance.
Letting SMEs know that we’re lending
This is one of our greatest challenges: getting out the message that we’re here, open for business, and keen to lend to small and medium companies. Business owners understand that the banks aren’t clamouring to help them these days. But the majority of SMEs still don’t realise they have other options when their regular banking provider turns them down for a loan. Others have become so dispirited by the financial institutions’ reluctance to lend to smaller firms that they’ve stopped applying for finance at all – from anywhere.
Our own research here and in the US, where our parent company Business Financial Services works with American entrepreneurs, shows that the UK mirrors trends on the other side of the Atlantic, with many small business owners in both territories no longer seeking capital because they expect rejection. Mr Cable acknowledges this problem, but if he really aspires to tackle it head on and to change the lending landscape for small companies in Britain, then it’s going to take a very much more concerted push than is evident at present.
Preserving the nation’s economic health
Of course, I recognise that the summer has seen awful and unforeseen developments globally, particularly in the Middle East. The Prime Minister and his deputy have a great deal to handle – even if they’ve faced criticism for taking holidays while the world appeared to descend into crisis. But whoever is in charge, and whatever horrors unfold elsewhere, government at home does not stop. And progress mustn’t stall on the more mundane, but absolutely essential issue of the health of the UK economy. And we all know the enormous contribution that small firms make to Britain’s economic well-being. Those 4.9 million businesses employ 24.3 million people, turn over £3.3 billion, and equate to almost 50 per cent of Gross Domestic Product.
Maintaining pressure on the banks
It will take determined will and ongoing political pressure to bring about much-needed change to small business funding. Having been faced with the inconvenience – and, let’s face it, commercial threat – of changing their practices, the clearing banks must be wiping their brows since the politicians have done nothing further to make their pledges of the summer a reality. In the past, I’ve likened the current banking system to a lumbering oil tanker, slow to move and make decisions, and often resistant to progress. To get the banking behemoths to change their behaviour will take a forceful attitude on the part of the political powers that be. The truth is that they’re not going to cooperate with or aid smaller operators like us voluntarily.
If the Government really means to open up the SME lending market, then real, clear, decisive effort is needed as soon as possible to deliver on its recent promises. Small firms’ appetite for investment hasn’t diminished over the summer, and neither has the desire of alternative lenders to help them achieve their goals. But what is needed is a bridge to connect the one to the other. The banks would play a significant part in forming that link. It’s up to the politicians to make them share information about their business customers with those of us who have the capital to help them grow. We’ve had enough political rhetoric. Now, it is time for action.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net