In its announcement, the BBA said that banks are more willing to lend than small businesses think with only 37 per cent of small businesses planning to apply for finance believing they will get approval from their bank. In contrast, the BBA says more than two thirds of small businesses have their loan applications approved.
“The problem is there is not just a scepticism among small business owners about their chances of securing bank lending but actually a perception, rightly or wrongly, that the banks are just not on the side of small business,” explains Marlon Wolff, CEO of small business advice hub Ingenious Britain.
The lending landscape, he adds, has changed significantly since the start of the recession to the point that small businesses are more open to alternative sources of lending than ever before.
“We think the banks are sensing that there may finally be genuinely serious threats to their position as the only major lending option and we think that, in part, is driving this new marketing campaign from the BBA. They must be concerned, for example, at the prospective launch of OakNorth, this new bank being set up by former Barclays head of UK operations Richard Davies, to specifically target small and medium sized businesses,” he adds.
The Government have been actively encouraging banks to enter the market as a way of providing choice to customers and finance for small businesses. But, says Wolff, the future of small business finance does not revolve solely around conventional forms of lending.
“Cash is the lifeblood of any business and cash flow is critically important, although many small business owners still fail to realise that. Wages need to be paid, overheads met, and stock or raw materials bought. So however profitable a business might be, whatever its potential is, and whatever the value of its invoice book, it needs good liquidity to meet immediate costs. Without liquidity it will fail. Whilst the banks have held back over the past few years small businesses have had to look elsewhere.”
Wolff cites peer-to-peer lending, invoice financing and even crowd funding as examples.
“There are real alternatives to bank funding now,” he continues. “There are companies offering a twist on invoice finance, for example, using an online platform where companies seeking immediate cash against valid invoices attract bidders in an auction. A company might offer, for instance, 85 per cent of a £5,000 invoice with repayment set at sixty days where the final offer bid might be, say, 1.05 per cent of the value, a mutually satisfactory outcome for the SME and for the investor. This is much cheaper than traditional bank factoring, lower barriers to entry and the small business remains in control of the invoices they want to auction and the price they pay for the service.”
The important thing to remember, Wolff adds, is that the UK has to get this right if its SME sector is to flourish and drive economic growth.
“The UK’s five million SMEs are vital to the economy, as they are at the heart of economic growth, providing 60 per cent of private sector jobs and half of private sector turnover. But despite 67 per cent of SMEs saying they’re ambitious to grow within two to three years, just 20% expand their workforce each year, mostly because of constraints on funding and investment.”