NO ONE needs to be told that it’s been a difficult few years for small businesses seeking finance, and economic recovery has done little to change this picture. The Bank of England’s latest Trends in Lending report found that the annual rate of growth in the stock of lending to small to medium-sized enterprises (SMEs) was negative in the three months to February, albeit less so than in previous quarters.
This is partly because banks have retrenched since the financial crisis, and partly because of a longer-term shift in their models. High street banks simply don’t make money out of small business lending anymore, and they no longer have business bankers in all of their branches.
But there are some positive developments ahead. While traditional bank lending is unlikely to recover to its prior levels, several key changes are going to make it much easier for small businesses to access finance.
First is the British Business Bank referral scheme. This has yet to be rolled out, and much will depend on the quality of the platforms it selects, but the idea is that a company rejected for a loan by a bank will be referred to an alternative finance provider. The devil will be in the detail: what is a decline from a bank; when will a company go into this process? But the broad principle is good. Existing partnerships between banks and alternative finance providers, like Santander and Funding Circle, are just the tip of the iceberg.
Second, and as part of this scheme, we could also see an agreement on the sharing of data. Currently, if a provider is looking at a company to assess whether it’s worth the risk of finance, it will have to go to Companies House to get filed information – and this can be up to 18 months old. Any agreement on the sharing of business current account data could noticeably improve lending decisions by all providers, and make access to finance that bit easier.
Third, there is much more to come from fintech companies. Peer-to-peer lending and crowdfunding are interesting new models. But the really exciting potential development is a portal that could be the Comparethemarket.com for the corporate sector. Twenty years ago, if you wanted car insurance, you walked down the high street to your local broker. Today, consumers are comfortable selecting from a suite of options from a range of companies online. If this could be replicated for small business funding, we could see companies access the finance that is most appropriate to their needs and from the right provider – not simply assuming that their bank should be their first and last port of call.
There is a risk, however. Given that small businesses will be using so many different funding sources in the future, personal finance education will be more important than ever. As we saw during the financial crisis, too many people use inappropriate financial products. The problem is that we don’t teach young people about credit cards, mortgages, or the various types of business finance on offer. I would like to see a GCSE or A-Level for the subject, so that everyone is able to make informed choices about how they manage their money and understand the key principles of managing business finance.
Mike Francis is head of asset finance at Investec.