Over the past decade, the risk appetite of the big banks has fallen, making them less inclined to provide finance to SMEs up and down the country. Consequently, small businesses have found it more challenging to secure funding through traditional methods.
Figures recently published by the BBA, for example, showed that high street banks such as RBS, HSBC and Barclays lent £312m less to UK businesses in September 2016 than in the previous month, the biggest slump in conventional business lending since June.
Starved of such funds, UK businesses’ ability to grow, hire new staff, diversify and increase their contribution to the economy is significantly impacted.
Don’t overlook small businesses
Why does this matter?
It is universally agreed that the UK’s SMEs are vital to the success of our economy. Their combined annual turnover is £1.8 trillion, or 47 per cent of private sector turnover overall. The total number of people employed by SMEs throughout the country is 15.7m, or 60 per cent of all private sector employment in the UK.
Put simply, small businesses – both within the big cities and outside of them – must succeed if the UK economy is to succeed. And yet, as we have seen, they are not being given the best chance to do so.
Bank referral scheme
The news at the end of October that the bank referral scheme for business lending has come into force, however, is a real positive for small businesses across the UK.
Under the scheme, the UK’s major banks are required to refer the businesses they turn down for a loan to an alternative provider, of which P2P platforms like Folk2Folk will be one option.
This initiative is set to contribute significantly to making information on alternative funding more accessible to local businesses that have been turned down by their high street branch.
Closure of branches
This is likely to prove more important given another change impacting small businesses’ access to finance at a local level.
The Federation of Small Businesses (FSB) recently examined the effect bank branch closures are having on SMEs, with its report highlighting the disproportionate impact closures are having in some parts of the UK, particularly in rural areas.
Many businesses in the countryside (although not exclusively) are vulnerable to reduced banking services and branch closures – particularly when the branch is the “last in town”. As more banks withdraw from rural areas, SMEs are becoming increasingly isolated and left with few to no options to help fund and grow themselves.
Filling the vacuum
The banks’ reluctance to lend to businesses that do not meet tick-box criteria has created a vacuum in which small business owners are searching for alternative sources of capital outside of the mainstream banks. It is here that alternative finance and peer to peer lenders are playing an increasingly central role and will become a first port of call in the future, rather than an afterthought.
Many businesses are already accessing alternative finance. A recent report from the University of Cambridge showed that more than 12 per cent of new lending to SMEs came from the peer to peer sector – in 2015 alone, 20,000 small and medium-sized firms raised money this way country-wide.
In particular, the ascendancy of peer to peer lending at the local level will encourage business growth outside of the City, pooling resources into rural areas by connecting local business owners with local investors. What we are now seeing is a return to a formally bygone tradition of community-focused lending, a movement in which our business has its roots.
Unlike the high street banks, alternative local lenders can take a more holistic approach through their local knowledge and understanding of the reputation of the businesses in their local area. This means that businesses can access the right type of finance that suits their requirements.
Moving into 2017, we expect lending to businesses to grow, especially at a local level, as alternative providers increase market share and legislation creates a viable alternative to banks for businesses that have been refused funding.
Growth outside of the city is dependent on solutions that work for businesses at a local level, and while the City and its institutions are also important to the UK economy, we must not leave businesses behind by failing to provide them with access to finance.
Ultimately, we want to see businesses coming to alternative lenders first. Things are moving in the right direction, but it is now up to the lenders themselves to implement policies that attract more businesses, while at the same time protecting them at every level.