Back in January of this year, merchant bank, Close Brothers published a survey suggesting that just over a quarter of UK SMEs felt they were not being served by their high street banks. In particular, the survey identified a perception that traditional banks lacked the specialist knowledge required to effectively support their small business customers.
According to the Close Brothers analysis, SMEs were also suffering from a knowledge deficit. Assuming that the high street players were the only viable source of finance, many went straight to one of the biggest banks. For first-time borrowers, this could be a dispiriting experience, with 50% reporting the rejection of an application. A third of those taking part in the survey, said they would never seek bank finance again.
And six months into 2018, there are signs that some businesses at least are doing their best to get by without any external funding.
Witness the latest rolling Business Credit Review published by research and analysis provider, BDRC. Covering the year to the end of May the research has found that demand for credit is down on 2017. In fact only 31% of those taking part in the survey were using credit over the January-May 2018 period compared with an average of 38% in the previous year.
Perhaps more worryingly, 2017 saw a decrease in the number of businesses that were willing to borrow to fund their growth and although the first five months of 2018 did not see a further decline, the figure was still down on 2016.
Reluctance to Borrow
There could be many reasons for a decline in the use of credit. Certainly, the Brexit effect may be taking its toll – prompting businesses to take a wait-and-see approach before taking on more debt. Equally – whether related to Brexit or not – the economy has been growing more slowly than expected. Again, this may be discouraging businesses from borrowing.
But that is only part of the picture. The number of businesses using credit may be down but demand is still there. And the truth of the matter is that if a business needs funding to grow or manage cash flow, then it doesn’t really matter if overall demand is lower. What matters is the availability of credit when it is needed.
And that is perhaps where the beginning of 2018 brought happier news.
Flow of Capital Increases
As the British Business Bank noted in its Small Business Finance Report 2018, while bank lending was flat in 2017, the aggregate flow of capital to SMEs rose over the year as a whole.
That was partly due to an increase in equity finance, which rose 79% in value in the first three quarters of the year, with the number of deals also increasing.
And as the report also observes, platform lending played its part in increasing the flow of capital to SMEs. In fact, the value of Peer-to-Peer business rose by just over 50% in 2017. Although representing just 3.0% of overall lending, growth in the sector shows that alternative finance is challenging the traditional ways of financing companies. Meanwhile, the value of asset finance tripled.
The British Business Bank characterises the corporate finance sector in Britain as nuanced and diverse.
Getting to Grips With Diversity
All of which must be a good thing. But the ability of businesses and their advisers to get the most out of a nuanced and diverse ecosystem depends – to a very great extent – on understanding that very nuance and diversity.
Which brings us back to the point made in the Close Brothers report that business often lack knowledge of the finance marketplace – hence their over reliance on high street banks.
Clearly, the growth of Alternative Finance provides compelling evidence that awareness of the ever-increasing range of options is spreading. Thanks in no small part to a huge amount of media coverage, the vast majority of business owners and their advisers probably know a certain amount about crowdfunding, platform lending and perhaps even invoice trading.
But it is important to also understand the nuances of the alternative finance market. To take market lending as an example, not all platforms are the same in terms of lending criteria and the tolerance for risk of their investment communities. It is important to prepare to borrow and research the market in advance of any loan application. Equally, anyone seeking to raise capital via a crowdfunding campaign, should also take time to understand the key players.
That said, as businesses face up to the challenges of the second half of 2018, it is worth taking time to celebrate to diversity of the market. Business proved itself resilient in the aftermath of the great recession. Equally important, the alternative finance industry has helped close a huge funding gap. Bank lending may have levelled off, but there are other solutions available.
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