Banks may be lending again, but alternatives continue to thrive

Adam Tavener discusses how an upturn in bank lending is also good news for alternative finance.

Although the Funding for Lending Scheme (FLS) turned three this summer, it will be phased out in January 2016 as it has been largely ineffective in providing SMEs with funding.

Despite this, recent figures indicate that bank lending to SMEs is starting to turn a corner as the appetite for funding is on the up.

Recent figures from the British Bankers’ Association (BBA) have shown an upturn in lending to non-financial businesses.

The BDRC SME Finance Monitor also found in May that among those businesses interested in funding, the proportion that borrowed money over the past 12 months has risen from 18 per cent to 35 per cent, compared with this time last year.

This growing appetite for finance is good news for both the banks and for the small businesses they serve. It is also good news for the alternative funding sector, as the small business funding market has been transformed over recent years.

In particular, we are now seeing the first signs of a ‘blended SME solution’ between the banks and alternative funders.

Basel and other restrictions mean that banks are unlikely to ever regain their former risk appetite, but they do want to keep the customer, the goodwill, and those bits of the funding package that they want to write.

This along with the following key factors will combine to ensure that the alternative funding market continues to grow at a healthy pace going forward:

Economic and funding winds have changed

Prior to 2008, it was much easier for a start-up to raise capital through the banking route but, in the ensuing years, start-ups have been forced to look at alternatives like crowdfunding, invoice trading, and pension-led funding.

And, with confidence in the economy on the up over the last 18 months, this has seen business owners increasingly turn to their bank, but also to alternatives as well.

This has meant that the alternative funding sector has been getting noticed time and time again for the right reasons and this is changing the views of business decision makers.

A survey of finance directors, undertaken with Manchester Business School last year, found that while only about around a quarter of FDs use alternative non-bank funding, this is set to rise, with over 45 per cent of respondents claiming they are considering increasing their borrowing from this source.

Bank referral legislation will start to kick in

At Alternative Business Funding, we estimate that over 100,000 small businesses could be fast tracked to alternative business funders as a result of the Bank referral legislation which received Royal Assent in April of this year.

This could see an additional £2 billion in business funding pumped into the SME economy in the first twelve months following implementation.

Furthermore, if the UK banking industry is forced to adopt the rules put forward by the Basel Committee on Banking Supervision, demanding a 300 per cent risk weight to be applied to small business – we could also see many more than the estimated 100,000 small businesses referred to the UK’s alternative business funding sector.

The referral legislation will also have a significant role to play in de-risking the banks. As a result, referring to alternative funders will no longer be a regulatory hazard.

Bank relationship managers (RMs) will ultimately morph more into the advisory, or at least outcome-focussed space, using quick and efficient portal technology to find solutions for their customers in the alternative sector.

Therefore a bank vs non-bank marketplace will be transformed into an environment where RMs, advisers, brokers and other lenders all use the technology at hand to ensure that the customer gets the best outcome, even though that may be sourced from a number of different providers.

The perception of the alternative market’s rapid growth

Some market commentators have suggested that the UK’s non-bank funding sector has grown too fast, and research from the Funding Centre, published last April, found that SMEs find this speed of expansion to be ‘daunting’.

Through my experiences of speaking to both alternative funders and business owners looking for funding, I would suggest that this is partly true.

However, I expect this concern to be reduced considerably when the British Business Bank assigns the designated portals for the bank referral scheme, expected next month, as this will provide the ultimate stamp of approval for the small business owner who previously felt ‘daunted’ by the sectors growth.

Awareness is rising

Finally, we are definitely seeing more SMEs aware of the alternative funding sector, and prepared, even if they get a yes from their bank, to explore other options.

I would always encourage an SME to speak with a funding broker to complete a risk and reward analysis of the different funding options available.

Further reading on alternative finance

Adam Tavener

Citlalli Fisher

Adam Tavener, chairman of Clifton Asset Management and a Small Business Profit Club panellist.

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