Who would have predicted the growth of an alternative lending market as we see it today? Well, as the saying goes, necessity is the mother of invention and the new market has grown because of the gap in bank lending.
The saying is true of many significant developments and it’s most welcome, if not slightly paradoxical, that the economic crisis has created a much needed shake up and opening of opportunities for new funding sources for SMEs.
For too long this very diverse population has been treated as a homogenous group when it comes to funding. There’s been a one size fits all mentality – need money, get a loan. SME funding needs are determined by many factors including the industry in which they operate, their business model and business strategy.
The funding solutions for a start-up e-commerce business compared to a high growth SME in manufacturing or a micro business that just wants to remain stable are very, very different.
There’s also been too much of a focus on funding for growth, when in fact the majority of SMEs aren’t aiming for growth. The goal for most is to continue trading and increase profitability and their daily challenges are cash flow and day-to-day management.
We need a much broader funding environment that is modelled around modern small and medium sized businesses. They need flexible finance from a broad range of options so they can select the best fit for their business. And they need it faster, more easily and from convenient channels.
A very good start has been made and the alternative funding market will grow and mature, acquiring appropriate safeguards on the way, such that it becomes part of the normal funding landscape.
As with any young sector, it will meet challenges along the way; one such example is the potential impact on all lending models when interest rates rise, especially those predicated to return good rates to investors. It’s an exciting journey ahead.
We need though to overcome the lack of awareness of the types of funding available, and in some areas, lack of credibility, amongst the majority of the small business community. Thought leaders, government and advocates must do their bit and it’s imperative that banks are mandated to refer customers they can’t help.
There will always be a market for bank lending and banks will continue to play an important role in that. They are, however, in an interesting position. They were asked to tighten up their lending, which they did, but they’re still under pressure to lend.
Let’s not forget that it was easy lending that caused the financial crisis in the first place, so they’re not going to let that happen again. But they are also in a unique position because they hold the transaction accounts of the UK’s businesses and as such have unrivalled access.
Perhaps it’s time for a shift in their role and to diversify from standard banking products to offer adjacent products and services that can help address the non-bank finance gap and provide business skills support for UK SMEs.
Whatever happens, I believe the future for small business funding is one of choice and opportunity.
Paul is CEO of Liberis, which provides business cash advance to small businesses.
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