Online comparison sites are developing client-focused pricing comparison abilities, where SMEs can compare the cost between asset finance providers. Brian Cantwell speaks to three digital SME business finance platforms to see how far SMEs are from accessing asset finance online.
The provision of asset finance credit for SME’s in the UK has become big business. In October 2015 the UK government department for business innovation & skills (BIS) stated in a statistical release that there were a record 5.4m private sector businesses in the UK at the start of 2015.
This, it said, was an increase of 146,000 businesses within a year and a 1.9m increase in SME numbers nationally since 2000.
As the number of SMEs has risen in the UK, so too has the number of alternative business funders who have entered the SME asset finance market since 2014.
Some of these are backed by private equity houses who have acquired leasing businesses, and therefore a distribution network to seed their capital, like Cabot Square, Star Capital, or Anacap Financial Partners.
Others, like Bank of London and the Middle East, are stretching down from the £20m middle-ticket bracket to get exposure to the SME market.
This is new capital, without traditional links to the UK asset finance market, and without the legacy relationships with the broker market held by more established lessors. Similarly the new SME business owners, be they limited partnerships or sole traders, are also looking online for their asset finance as part of a generational shift where the internet is often the first port of call for finance.
Digital concept, market response
The concept of an online SME business finance comparison platform in theory poses a challenge to the established funder-broker market model.
As a concept, not only is it a challenge of UK asset finance distribution (i.e. it does not necessarily adhere to the broker as the first point of contact for a commercial finance client), but it’s also part of a financial technology wave termed ‘digital disruption’, that has seen Uber put the London black cab trade into decline, and Airbnb challenge hoteliers’ revenues.
A year ago Leasing Life looked over an early version of this online concept called Co Hub, launched by an ex-Money Supermarket employee Philip Brennan, in a feature available in February issue 257 or online, titled ‘Will price-comparison sites work in leasing?’
At that stage, Co.Hub was 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.
In the interim period, Co.Hub has rebranded as Businesscomparison.com, but is still plugging away at the concept.
Businesscomparison.com managing director Tim Moss said demand for online access to commercial finance was growing among SMEs.
"We are investing in technology here that means that customers are going to be able to have full end-to-end journey. We obviously have some strategic partners at the moment where the ‘lead model’ exists, but it is very much the traditional world. But we see pure leads as a diminishing market, as customers won’t just fill that information in and be able to be contacted, but actually will want to find more information online."
Credit data and underwriting is key, and as ever, accurate data is of prime importance for these digital platform providers.
"The problem at the minute is that the data is imperfect from the credit bureaus, that allow you to see the profile of the business," says Moss.
"The likes of DueDil are getting better with the information. But right now making online decisions is so terrifically difficult, unless you’re underwriting the customer for a small unsecured loan for their business.
"So the credit bureaus have got a role to play in this but we are looking to the future where customers will not want to speak to people. They will want the quote; they do not mind filling in additional details online, but initially it is all going to have to be available at first request online,"says Moss.
Shrinking funding gap meets rising choice
The boom in the number of UK SMEs and the number of funders catering for them tempted former Goldman Sachs and BNP Paribas investment banker Paul Surtees to launch his website Capitalise.com with tech partner Ollie Maitland.
"At the moment only about 10% of businesses are aware of alternative finance," says Surtees.
"With so many lenders in the market, all saying they want to work with SMEs, the challenge is how do they pick the lender that’s most appropriate for them.
"The onerous process [is sorting through] lenders and investing time in it… and even more time into what the products are – that’s why the broker market exists. What’s missing traditionally is an open, transparent methodology, and we’ve got a different approach. We’re not relationship-heavy, we’re transparent in pricing, so we have a different proposition to a broker."
While most SME lessors focus on the UK’s estimated 6,500 commercial finance brokers there is a growing provision gap for new SME businesses that are not covered by the broker network.
Surtees says that the search engine approach is often the first way that SMEs come into contact with asset finance.
"The most searches in Google are for business loans," he says. "Most people don’t type in asset finance; they don’t type in invoice finance, and that’s why those key words in Google are so expensive.
"If you’re an asset finance lender, then you really want to capture that traffic. As a comparison site, we can capture those more generic ones, and transition the client into a lending product that’s suitable for the hooks in their business, and if that transpires that it’s asset finance, then great" says Surtees.
The digital methodology
Both Businesscomparison.com and Capitalise.com offer live rates from funders online once SMEs have entered information, rather than referring SMEs to the lender as a lead.
As a result, they gain a lot of data. Both sites harness behavioural analytics and big data, so that interactions on the site of both funders and SMEs develops the intelligence of the platforms.
"Most businesses, not just in finance but in any aggregator business, do this kind of scoring and measuring on the business side of it – we do it on the lender side," says Surtees.
"We have behavioural analytics as to how the lenders react to our deals, so that then a business goes to a lender, we measure how quickly they pick it up; how it progresses; then [the offer] of indicative rates, what the conversion is relative to pay outs, and we overlay that to our criteria, and then we get sectoral biases," says Surtees.
"So some lenders, some asset finance lenders, will say that they do everything with every sector. But the data shows that there’s only a couple of sectors that they really want to focus on, and a couple of assets that they really want to work with. Over time, we have a big data churn that constantly refines our algorithms," he says.
Surtees says that remuneration for Capitalise.com from lenders is different to the established manner of remuneration for brokers.
"We get paid like a traditional broker, but the difference is that our representation of lenders has got nothing to do with the brokerage that we receive," says Surtees.
"The algorithms are agnostic to commission – how we get paid doesn’t factor into the pricing as the lender pays our fee."
Yet the commission format that commercial finance brokers currently work with might be challenged by the system that Capitalise are developing, which is designed to encourage volume.
"We are working on getting a flat fee across all of our lenders," says Surtees.
"That is an ongoing process. Lenders are shocked when we say we don’t want a finder’s bonus and that we want a flat rate but they’re happy because it costs them less."
Surtees points out that while disruptive to the established system, Capitalise.com is a market efficiency, not a market killer.
"I think asset finance is more challenging than other products. We are seeing the evolution of things like working capital at the lower numbers; and invoice finance at the reasonably big numbers – MarketInvoice, an online invoice finance online platform, are proving that, and Funding Circle are doing a pretty good job at sub-£250k unsecured products.
"The asset finance market and property finance I think will continue to have a manual process – unless you get to a place where it’s a vendor/franchise process, where it’s high volume, low ticket deals, that could be signed off on an i-pad. The watermark will continue to rise as those deals get easier to write," says Surtees.
Market referrals going online
Over the last two years the UK government has been working on an online business referral platform, for SMEs that were not suitable for the high street banks to give loans to, which is to become a prime shop window for alternative finance businesses.
Sources close to Leasing Life had expressed frustration that the platform, the idea of which is written into the Small Business Bill currently working its way through Parliament, had seemed to hit the buffers at the end of 2015.
While the inertia of a government-led platform promoting alternative finance to fill the UK funding gap may have slowed, it seems that this ‘platform’ may consist of several sites and private market options, as inferred in the UK government’s Budget.
UK Chancellor George Osborne wrote in the Budget: "Small firms that are rejected for finance by high-street banks will be able to access new options as the Budget announces that Bizfitech, Funding Options and Funding Xchange will be designated as finance platforms to help match borrowers and alternative lenders."
Adam Taverner of SME referral site and funding platform Alternative Business Finance (ABF) has been involved with the evolution of the government-led referral platfom.
Essentially ABF is a lead generator that supports the broker system. Bibby, and LDF are present on the platform, with more being added regularly.
"ABF is keeping banks in the picture where their product suite is appropriate. Barely any of our funders offer bank accounts, but they offer funding of a specific sort. Santander has partnered with our site, and they refer a significant volume of traffic over to ABF – around 10-15 deals a week," says Taverner.
ABF is part of the growth of demand for online asset finance driving the digital trend of efficiency. ABF supports the broker model, but Taverner clarifies the challenges the platform makes to brokers.
"There is a population of deals that genuinely need a broker, a good quality broker, who can add value to the proposition through their experience, their understanding of a broad suite of products," he says.
"Equally, there is significant population of deals that probably don’t actually need a broker input. From the bank’s point of view, and the legislative point of view, (i.e. the Small Business Enterprise and Employment Act), bank referral legislation provisions is a disintermediated place," says Taverner.