Opinion

Unscrupulous banks have fuelled rise of alternative lenders

5 min read

23 February 2018

Quick Capital's FD gives his opinion on the FCA's leaked investigation of the Royal Bank of Scotland's GRG scheme – and how it has fuelled the rise of alternative lenders.

Can small business owners trust big banks? Since the 2008 crash, these high street institutions have been reprimanded time and again for a reluctance to lend to SMEs. Tens of thousands of businesses have gone to the wall over the last decade as a direct result.

Now it emerges that one bank was actively working against small businesses in its greed-fuelled quest for profits and bonuses. RBS has been exposed for making up fees, imposing punishingly high interest rates, acquiring equity and property from failed businesses – and pocketing huge bonuses off the back of it.

This is a publicly-owned bank, but its behaviour has not been in the public interest. No wonder Federation of Small Businesses chairman Mike Cherry claimed the scandal “had made firms wary of applying for bank loans”.

Our experience is that independent businesses still want to believe local banks are trusted advisors and champions of the SME – but simply can’t. Instead, the FCA’s report on RBS is another example of how far big banks have fallen in the eyes of the business community. The once-prized status as the champion of UK SMEs is long gone.

If the pursuit of profit over purpose is possible within an organisation such as RBS then it raises questions, certainly for business owners, about the trust we place in all traditional banking institutions.

Since the crash, the independent business community has become increasingly aware that banks are no longer the go-to for business finance, due to the increased scrutiny applied to business loan applications. That’s why so many innovative alternatives – like business cash advances and peer to peer lending – have emerged.

Small businesses need money for a variety of reasons – cashflow, growth – and in most instances, need it fast. After all, when a business is new and growing fast, opportunities arise and decisions are made rapidly. It is precisely this kind of help that RBS’ Global Restructuring Group was meant to give, rather than being a department designed purely for profit.

As disappointing as this is, the onus is now on the independent business owner to research all funding options and work with alternative sources of funding where the treatment, rates, advice and repayment terms are clear, fair and transparent.

Bodies such as the Association of Alternative Business Finance have emerged to provide a single voice for this new sector. It promotes transparency, responsibility, fairness and security among alternative lenders. Exactly the standards and principles that tarnished institutions should be providing as standard.

As a result, it is alternative lenders that are now the go-to for independent businesses in need of assistance when it comes to growth. Take, for example, the business cash advance, which is sometimes referred to as a merchant cash advance. This funding can be from as little as £500 up to £300,000 and is advanced to the business against future credit and debit card turnover.

The money agreed is quick and there’s no need to prepare a business plan or provide security. The amount borrowed is then repaid as a small percentage of daily card payment transactions, rising or falling in line with card turnover.

This kind of flexibility is extremely attractive to independent business owners, because it is designed around their needs; it’s exactly the kind of service that RBS’ Global Restructuring Group promised its thousands of customers, before mistreating them.

The difference is that alternative lenders have earned the trust of independent businesses and will maintain that position through transparent and fair behaviour and by putting business’ needs first.

RBS, meanwhile, might be promising that its culture has changed since these bad old days but it will be a long road back before the UK’s small and medium sized businesses ever trust them again. In the meantime, the alternative lending sector will continue to grow and flourish.

Mike Prendergast is finance director of Quick Capital