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How will new bank rules support small business funding?

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But how might the potential changes help small businesses in finding the funding they need?

Healthier competition

If banks do change their policies and start recommending online sources of alternative funding to all their rejected customers then the impact on small business lending could and should be quite dramatic. 

A variety of online finance providers should, as a direct result, find their services suddenly much more in demand, which should in time lead to a much more competitive SME loan market being established across the country.

As it stands, the market for SME loans is widely recognised as being damagingly uncompetitive, with big banks continuing to dominate the sector, despite generally being very reluctant to lend. 

Increased awareness

A major reason why banks continue to provide 90 per cent of SME loans is that so many small or medium-sized business bosses still consider them the only reliable route to finance. 

The reality though in 2014 is that the alternative finance sector has been growing apace for a number of years and now covers a broad range of viable funding options for businesses.   

Bridging this awareness gap will not be easy but with the right cooperation from banks, it should certainly be possible and the SME sector as a whole stands to benefit considerably as a result.   

Helping more SMEs stay afloat 

A key reason why the reluctance of big banks to lend has become such a burden for the UK’s SME sector is that small and medium-sized companies often need access to finance under emergency circumstances.

Currently, the prospects of accessing loans from banks during times of financial difficulty are far from good for SMEs, which is detrimental to the small business sector and, ultimately, to the wider UK economy as well. 

By contrast, a number of alternative funding solutions are designed to help SMEs precisely when they are struggling with debts or in dire need of a cash injection. If the government’s incoming legislation succeeds in raising awareness of all the alternatives available then the UK’s small business sector is likely to become much more resilient as a result.   

Supporting growth 

If alternative financing and options beyond mainstream lenders can be introduced into the SME loans equation as a matter of course, then the growth prospects of the small business sector should be much better served. 

The innovative and highly competitive nature of the alternative finance sector means that SMEs stand a much improved chance of seeing their growth ambitions supported there than is the case with banks and traditional lenders. 

Getting good advice 

One issue very likely to emerge as a central concern if the new SME loan laws have the desired effect is around advice and support in the context of alternative finance.

Without it, small companies could find themselves taking on too much risk or committing to financing packages that do not suit their situation or the aims they have in mind. 

An important next step for the government and for the SME sector as a whole is to move beyond awareness of alternative finance and towards an appreciation of the pros and cons of the specific solutions that are available. 

Nevertheless, the government should be applauded for taking steps to address the problems SMEs face in finding funding options and the draft legislation unveiled in recent days could prove an important move in the right direction. Let’s hope so.

Conrad Ford is founder and MD of Funding Options, part of the 2014 Everline Future 50 

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