As part of George Osborne’s recent Small Business, Enterprise and Employment Bill, banks which refuse loans to small businesses will be obligated to provide SMEs with advice on alternative funding options.
Whilst the government’s renewed focus on financial support for SMEs is encouraging, does the bill go far enough to rectify the inherent financing problems that small businesses have always faced?
SMEs play a vital role in the UK economy, currently representing 49m businesses, employing 60 per cent of the UK’s workforce and accounting for almost half of UK turnover.
Nevertheless in the past year 40 per cent of SMEs have been refused loans from high street banks and the majority did not go on to seek alternative means of funding.
Inadequate information regarding financing options has too long been a significant hindrance in the ability to grow a business. With over 700 separate SME support and funding schemes in the UK, small businesses need to be given clear, appropriate advice, which will address their business needs and ensure ongoing financial stability.
Osborne’s new legislation has therefore been widely welcomed by the SME community. But what platforms are on offer and does this bill really go far enough to help businesses generate cold hard cash?
The rise of challenger banks, a new generation of smaller lenders, offers one alternative to traditional finance. The “big four” – HSBC, Barclays, Lloyds Banking Group and RBS – currently hold an 85 per cent market share in SME lending, but funding to small businesses actually fell by £723m in Q1 2014. SMEs should be encouraged to apply for loans from challenger banks such as Aldermore Bank and Shawbrook Bank, who are committed to supporting small businesses. For example, last year Aldermore Bank increased its SME lending by 53 per cent to £1.69bn. Challenger banks offer SMEs a more personal service at more affordable prices.
SMEs should equally consider alternative lending, a popular substitute to bank borrowing which initially arose in response to the UK’s economic crisis. Alternative lending by online funders to small businesses alone reached £1bn earlier this month and is now expected to be worth £1.6bn by the end of the year.
Although occasionally criticised for higher interest rates (in comparison to high street banks), alternative lenders – such as online direct funding companies- propose a quick, cheap and convenient solution to financial aid.
These alternative lenders, such as peer to peer lender Zopa, have fewer security requirements and a faster decision processes than challenger banks or traditional lenders and therefore allow business owners to manage their cash flow whilst successfully developing their company.
However, while clearer guidance on alternative funding offers significant benefits, how effective is it in addressing the problems that SMEs face?
Osborne’s bill has been criticised for its failure to address the problem of late payments. In their enthusiasm to work with large companies, SMEs often find themselves strapped for cash when these large corporations fail to pay their bills on time.
Often SMEs will turn to invoice financing, companies such as Market Invoice, whereby a third party buys a business’s bills for a fee. The benefits of this form of alternative lending is that cash is obtained almost immediately. This form of factoring has become the solution for SMEs when they find themselves short of money.
The introduction of the Small Business, Enterprise and Employment Bill is a significant step towards the growth of SMEs, and it is deeply encouraging that alternative finance is not only being addressed but also advocated by the government.
However, in order for this bill to truly benefit SMEs we must encourage and advocate a supportive mind-set not only in Westminster but in bankers, alternative financers and investors alike. Nurturing a collective financial responsibility for UK business growth will not only save SMEs time researching their options but will also deter them from giving up at the first hurdle.
It is time to take the “alternative” out of “alternative finance” and encourage a truly collaborative financial community.
Shalini Khemka is CEO of E2Exchange.
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