The alternative finance sector is no longer alternative. While some traditional lenders will cast scorn on the growth of "challenger banks" and the explosion of alternative finance platforms, the irrefutable truth is that they are here to stay. Accelerated by a combination of regulatory restrictions on the high street banks and the resulting impact on their ability to service the needs of SMEs, alternative finance providers are reshaping the business credit ecosystem, and for the better.
At GLI Finance, we’ve witnessed this seismic shift first hand, and since 2012 have built a portfolio of 16 platforms providing eight different types of finance across three continents. These platforms offer practical solutions to SMEs including loans, bonds, supply chain finance, trade finance, invoice trading, financial matchmaking and even rewards and donations. Since inception we’ve collectively lent over £250m (€339m) of finance across over 1,000 transactions. It’s provided us with a unique perspective of the challenges facing SMEs and perhaps more importantly, how they must be better supported as the lifeblood of the UK (and global) economy.
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Take one look at the statistics and it’s clear that more must be done. According to 2014 figures from the Department of Business, Innovation and Skills, half of all small firms that apply for a bank loan are rejected – that’s 250,000 businesses a year. And a further 250,000 are deterred from applying in the first place. When you add to this the fact that 90% of current SME lending is with five banking groups, and that net lending via the Funding for Lending Scheme has been negative for the last three quarters, you realise how vulnerable our SMEs are.
What’s important to recognise is that this issue is much more complicated than just a lack of available funding or a willingness to lend. It’s a question of combining this with the right product at the right time. Quite often for small businesses with the potential to succeed, traditional loans and overdrafts simply fail to meet their financing needs. They often need more flexible solutions, for example to fulfil a big order or finalise a crucial deal. While more credit is undoubtedly part of the problem, it must be accompanied with a diversification in the type of products SMEs can access and a more tailored approach to delivering solutions that have real benefit.
So what needs to change? Broadly this can be broken down into three key areas: educating SMEs about the value of alternative finance; supporting and fostering the sector’s growth; and implementing consistent regulation to ensure its long-term sustainability.
Let us first address the education issue. Put bluntly, the industry and its flagship ambassadors such as the British Business Bank must take better responsibility for educating SMEs about the range of solutions available to them. Too often SMEs are left under the false illusion that to secure funding, they must turn to traditional banks as this is ‘where the money is’. This perspective is at best inaccurate and at worst fundamentally detrimental to their future.
There is evidence that in this regard the tide is beginning to turn and recent figures from the EY Commercial Banking Survey of 2,000 institutions found that 53% of SMEs are using some form of non-bank finance and that a further 38% would consider doing so. More must be done to raise awareness among high-growth SMEs that the alternative finance sector is able to offer solutions and products which are better suited to their needs allowing them to access credit in a timely fashion when they need it most.
Crucially, this education must be supported by a vibrant and robust marketplace and we must continue to support the evolution of the alternative finance sector and the diversification of funding solutions it offers. No two SMEs are identical. They are governed by a myriad of growth drivers and financing requirements which makes them unsuitable for the blunt algorithm-driven volume-based approach of traditional banks. It is why GLI Finance has so strongly welcomed the Small Business Bill which will ensure the establishment of a robust framework in which SMEs refused finance by traditional banks will be automatically referred to an independent platform which can assess their needs and make them aware of the alternative options available.
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By GlobalDataThese measures should be applauded; they will further increase demand in the sector and will play an important role maintaining its growth, helping it build on its estimated market size of £840m in 2014. As with all these things the devil will be in the detail and the Government must ensure its implementation is closely monitored and most crucially that the timescale of the framework matches the often urgent demand for credit that SMEs face.
The final piece of the jigsaw relates to regulation and the consistent enforcement of this, particularly given the explosion of the sector and its rapid growth. The FCA has tackled this issue relatively well to date albeit with a somewhat piecemeal approach. The sector is broad and diverse which is healthy, but its various strands are also at different stages of maturity which needs to be considered. Many of the measures implemented thus far have centred on zeitgeist niches such as crowdfunding or peer-to-peer lending and we must move beyond this to develop a consistent framework for the entire spectrum of alternative finance solutions.
Developing regulation that encourages innovation but instils confidence in the sector and its long-term sustainability will not only further boost SME demand but also attract additional institutional investors providing significant firepower and helping allay any potential concerns around supply and demand. It’s why at GLI Finance we invest capital from our own balance sheet through our platforms to ensure we’re able to help close the SME finance gap effectively and deliver maximum impact.
Progress on all three of these areas has been positive but the sector must not take its eye off the ball if it is to take advantage of this fantastic opportunity. With a year-on-year growth rate of 90%, according to innovation charity Nesta, 2015 may well be the year when alternative finance begins to shake its "alternative" tag line. Better education, innovation and regulation are at the heart of this and to supporting the SME lifeblood of the UK economy.
