Last month a former MoneySuperMarket employee set up Co.Hub, a price-comparison site for business finance. Raising awareness among SMEs is vital for the asset finance industry, but might more engagement with small business erode the position of brokers? Brian Cantwell talks to some of those involved
All banks publish research and reports: various barometers to take the temperature of the needs of SMEs.
Last year, Hitachi Capital’s survey of 1,000 businesses said only 140 of the SMEs it spoke to relied on asset finance; 320 firms used their own funds, 90 used bank loans, and an alarming 190 used a bank overdraft, most likely on a current account or shared business account.
Aldermore said it found that two-thirds of UK SMEs had no business savings account; Bibby said a third of SMEs would swap finance provider in 2015; Close Brothers said that nearly half of the SMEs it spoke to were "still troubled by funding".
With such a diverse and experienced asset finance, leasing and asset-based finance market in the UK, why is there a growing disconnect between supply and demand, funder and SME? And why is there so little capacity for engagement?
Part of the reason, believes ex-MoneySuperMarket Phillip Brennan, now managing director of SME finance comparison site Co.Hub, is awareness.
"We are trying to build the market," says Brennan. "I think there’s a significant asset finance market out there anyway, but I think we want to build and drive people to come online, because you get the awareness while they are there and they can do a price comparison."
There is of course a problem with that easy take on the market: the asset finance market is predominantly broker-led, on a face-to-face trust-based system, which serves as a portal to the competitive choice presented by different lessors to potential customers.Brennan agrees, and says the impetus with his site had been to get a working model up and running and then build ambition as lessors gained knowledge.
"We don’t have loan pricing unfortunately, because there’s a lot of risk-based pricing in all types of commercial products. We don’t show the prices up front; it doesn’t show prices for loans just yet.
"The plan is to advance it further and further, but initially the first thing was to get something out there."
And so, for the time being, Co.Hub is tying up with UK brokerage LDF for incoming UK asset finance enquiries channelled through the site.
"We are reliant on brokers on the asset finance side at present, all enquiries go to LDF; they are a firm we have known for many years. We feel that they are a good source that our customers can use," says Brennan.
Co.Hub isn’t the only website in the market aiming to popularise the use of asset finance, and so far, Co.Hub’s remit is small: compared to the £1bn (1.3bn) worth MoneySuperMarket’s retail site visits, Co.Hub is operating at around 7,000 visitors a month across all its channels, including business loans, invoice finance, asset finance, commercial mortgages and merchant cash advances.
The possibilities are limited by the volume of sales initially, but the aspiration is to grow, says Brennan.
"We are in the early stages in terms of traffic; I’d like to be in a position where it is over 20,000," he explains. "We’re speaking with a credit analyst who is creating a system for us where we can credit-profile our customers that come onto the site without doing any credit checks, which we can put forward to lenders who can then give us indicative rates."
The reality is that it is very early days indeed for price-comparison sites in asset finance, but the growing number of these sites heralds an innovation in the way the market is portrayed and publicised to those seeking asset finance.
The overriding force of MoneySuperMarket and Co.Hub as it stands is to raise awareness, which chimes with what lessors are saying about the need to raise awareness of leasing for SME financing.
The internet is a disruptive force on the traditional market setup, putting the choice into consumer’s hands. Co.Hub is trying to put that availability and upfront element into a market which is not yet built for it.
It is opening up a market to corporate lessees, which might be profitable to the market as it stands, while challenging the market setup.
Brennan says: "[The site] will affect brokers, because people could get out there and do it themselves.
"Is there a place for brokers? Yes, there’s always a place; you can’t get all the answers online. There are people who sit outside the mould who are always going to need to speak to an expert.
That’s not to say that size and inertia of a large internet portal couldn’t disrupt the process in future, he adds.
"In future what we would like to do is get to a position where in terms of lending we may be able to understand the demographic of customers that we are getting and be able to go out and negotiate exclusive deals, something we commonly did at MoneySuperMarket.
"A reason to come to Co.Hub is because we could offer the best deals. There are conversations that will take place this year as we start to build up a database of customers who are using, then we can build up a portfolio of products customers are using," says Brennan.
But could there be regulatory fallout from publicising a corporate loan? This year and last has been particularly hard for the UK broker market, with the non-corporate sector of asset finance loans becoming closely scrutinised by the Financial Conduct Authority (FCA), and as a result many have predicted brokers numbers to change, with some retiring and others moving away from non-corporate business.
In July of last year, the FCA published a thematic review under the general theme that price-comparison websites (on the retail side) were failing to meet FCA expectations.
A release at the time said the FCA found that the price-comparison websites did not always ensure that consumers were given the appropriate information to help them make informed decisions.
"This is particularly important," wrote the FCA, "as the FCA is concerned that consumers’ focus on headline price and brand when using price-comparison websites could distract from crucial product features such as policy coverage and terms."
Brennan was aware of the risks, responsibilities, and the simple fact that regulatory requirements can change.
"We’re in a position where asset finance is not fully regulated. We’re wary that it’s not being scrutinised, but it could retrospectively be in the future," says Brennan.
"We have a compliance team that we can call upon externally, so we just make sure that when we are making changes, we run it past them.
"As long as the FCA can see some thought process with regard to customers being at the heart of what you’re doing, then [that’s the important thing].
The other issue is data protection, which Brennan says was fully covered in the site’s legal arrangements.
"We don’t sell customer’s data, we never will, although we might remarket other product to them, but that all comes from us, but never to a third party, "says Brennan.
"We are never going to sell on a potential database of customers, but we have got interim permissions at present with the FCA to be regulated as a business."
There are also changes in the market that are worth considering, like the drop in demand for the UK government’s sponsored Funding for Lending Scheme (down £400m (507.26m) at the end of last year), and the growing competition in the UK lending market, which saw commissions and fees for mid-market businesses drop off in the last quarter of 2014, according to the Bank of England.
In its credit conditions survey, the Bank said that loan pricing spreads, the points between the lowest and highest prices for loans, had narrowed significantly for medium-sized companies and large corporates by the end of last year, while spreads on loans to small businesses were unchanged.
The small business end of the market seems to be the place to be for growth and good returns on commissions and fees.
Brennan is agnostic: "I don’t know whether we will have an effect on market efficiency or loan pricing. We’ll be driving a lot of traffic; we are going to build awareness; we’ll be making a lot of noise. So given visibility often effects price, I think the numbers that are joining the market at present in terms of commercial lending will naturally mean an increase in supply, which will mean a reduction in cost. Especially as lending costs are quite low at present."
So what’s the view from the other side of the fence in the deal, where the attempts to publicise are balanced with the complexity of the business loans?
Callum Stephenson, communications manager for LDF, is positive about the possibility of ‘hot’ leads that the Co.Hub association could deliver, but is more circumspect about a possible challenge to the broker’s role in the sales process posed by a ‘MoneySuperMarket’ challenge.
"Price-comparison websites are something that the consumer market has been used to for some time now," says Stephenson.
"Certainly people and individuals seem to be using them more and more than ever before and it’s become a raging success in the business world. There are some people out there who think that it may go towards that way, and there’s some scope for it to work. I think it just depends whether somebody can put together an online system that can give a decision, and make it viable for people to get there at the end of a click of a few buttons."
But the truth is that there is a benefit to be associated with a publicising effect that the website serves as a lead generator.
"We know how difficult it is when you are doing telephone sales and you are cold calling people," continues Stephenson. "It’s an awful lot of work, and uses a lot of skills to get to a deal. It’s not just ringing up somebody and you have a deal, or catching a business at the time that they are buying a piece of equipment. It’s just a challenge in itself. You’re often talking to people who say, well, I have some plans in the next six months. Then it goes onto the back burner."
Yet one of the reasons that LDF is the main route for the process on Co.Hub’s site is that the asset finance process is complicated for the diligent broker.
Stephenson says: "There’s lots of information [to be gathered], and there’s a quote approval and then the document drawdown, which is a big task. I don’t know if there are that many people who could put that together on an online service. That’s fine for mortgages, and its fine for insurances and various other things that can be relatively compared, but I think at the moment in our market it’s challenging."
The disconnect seems to be that the market in the UK relies on a person-to-person connection and going in and having a talk, the crux of the broker system, and it’s that human element that sells it. Might there be a way of harnessing that in the future for an automated service?
"That’s the ultimate challenge – we have found that in previous years that personal connection is very prevalent and that is why things haven’t moved as quickly as the consumer market has, where it’s very straightforward," says Stephenson.
"The moment you are dealing with a non-limited company, you can’t access their financial information, so you have no idea who you are lending to, it’s a name. You can do personal searches on partners, but that gives you their personal information and nothing on the business.
"You have to start asking for other information; does that then make it very automated and very easy it squeeze into what we are discussing? No it doesn’t. There is still a big need to have that personal touch."
The corporate price-comparison idea will have to compete with alternative lender platforms that the market has generated to deal with requests for finance rejected by high street banks. Legislation is progressing through Parliament within the Small Business, Enterprise and Employment Bill to ensure that this will become legally binding in the future.
Adam Tyler, chief executive officer at the National Association of Commercial Finance Brokers has been involved with the government efforts to create a proper platform for SMEs seeking finance, presenting the market with its own site.
"The [UK] government is trying to find platforms that can deal with SME leads that have been rejected by the high street banks, and our platform has been in place for over two years, FindSmeFinance.co.uk, with access to 1,300 brokers and 120 lenders," says Tyler.
"[A price-comparison site in this space is] never going to work; every loan is different, every business loan is priced differently.
"The British Banker’s Association is looking at our new platform as we are seeking designation from the Business Bank to be one of the providers for one of these websites. So, obviously what you are talking about there [Co.Hub], there are things that are light years ahead of that."
Once competition delivers options that are ‘disruptive’ to the normal distribution system, by making loans pricing openly competitive but preferential for SMEs, market efficiency will drive costs and prices down.
The price-comparison idea seems completely at odds with the system that UK broking is built on, and Brennan too is dogmatic in his recognition of the amount of time things could take to change, but he is quietly confident that he can work with the broker market to make the market better.
He says: "I think we’re most probably where the retail side [of lending] was 15 years ago, 12 years ago, whereas we get a small amount of traffic online for business financing, but most people still walk into their banks for business loans. I read that 60% or 70% of people seek finance in the bank branches – if they are declined they won’t look elsewhere.
"For businesses, they don’t generally look online, they are so reliant on the brokers; it’s done by word of mouth, so it’s a little bit backwards.
"When I speak to people in businesses that I know, and I ask them how they decide on their [business] current account, they often say they just go into the bank where they have their personal accounts."
Awareness is key, and the market is learning through its efforts.
LDF’s Stephenson adds: "I think [the price-comparison process is] at the very beginning where it’s starting to shift, if you look at it on a macro scale. We’re at the very beginning of whether we can see somebody in the market go down that automated route."