SME Funding – Are Banks Doing Better?
The trials and tribulations of SMEs trying to secure funding in a post-credit-crunch world have made plenty of headlines, at least in the business sections of the media. SMEs are the business equivalent of first-time buyers in the housing market, struggling to compete for finance against those with deeper pockets in an environment where lenders are struggling to balance the fact that both the government and their shareholders want (and need) them to lend with the fact that regulators are breathing down their necks checking that they are only lending to people (or businesses) who/which can actually afford the loan.
The challenge of demonstrating affordability
While today’s fledgling SME may turn into tomorrow’s corporate behemoth, or a respected hidden champion in its industry niche, the fact of the matter is that, for various reasons, many of them will fail along the way and depending on how they fail, they may take their creditors’ money with them. Without an established track record, SMEs have to base their credit applications on assumptions and projections and high street lenders of all people have good reason to know that both of these can be (widely) out of step with what happens in reality.
Brexit blues begin to bite SME financing
Specialist insurer Hiscox surveyed 500 firms and discovered that over a third had accessed EU funding. While Brexit is still in its very early stages (and, who knows, may yet never happen), it’s probably safe to assume that the ability of British companies to access EU funding will be withdrawn in all but the softest and gentlest of Brexits. Given the difficulties UK-based SMEs can experience in getting credit from mainstream lenders, it’s quite understandable that some of them are very nervous about what the future holds for them.
The chancellor tries to help
In November last year, the chancellor, Philip Hammond, introduced a scheme by which 9 high street lenders agreed to refer SMEs they had declined for credit to one of three funding platforms: Funding Xchange, Business Finance Compared and Funding Options (the businesses are asked for their permission first). A fourth platform, Alternative Business Funding (ABF) is due to join the scheme in November this year. These platforms will then pass on the companies’ details to alternative lenders, which might be able to assist them. While this initiative does address the fact that SMEs which are declined by one lender may be too disheartened to approach other ones, possibly assuming that all lenders use the same criteria, it will be interesting to see what impact, if any, it has over the long term.
Quality matters as well as quantity
Even though the credit market is a regulated one, it is ultimately still driven by the laws of supply and demand. In other words, borrowers who can take their pick from a wide range of potential creditors are far more likely to get a more favourable deal (read lower interest rates) than those who only get a few offers on the table. That being so, it is very important that there is healthy competition in the business credit market, even where SMEs are concerned, to avoid businesses which are declined by the high street lenders being forced to seek credit from the high-interest lenders who are the B2B equivalent of payday loan companies in the world of personal finance. Fortunately there are still niche lenders in the market who focus on lending to SMEs and hence understand the issues facing them and who empower human professions to agree loans at reasonable rates even when a computer would have said no. Hopefully the government initiative will, at the very least, make SMEs more aware of this and encourage them to look further afield than the high street lenders but without heading straight to their high-interest counterparts.