Over the past couple of months, I have spent quite a bit of time at Westminster and in the presence of some of the UK’s leading banking advisers.
This included a visit to Number 10 as part of a major policy session on alternative funding.
The reason for telling you this is not as a trumpet-blowing exercise, but because these meetings really highlight the current funding-related political and financial thinking: that collaboration between the banking and non-banking sector is undergoing a major step-change.
At one such meeting, I met Lloyds Bank’s Stephen Pegg, who is also the British Banking Association’s spokesman on SMEs.
His message was very clear: we produce better deals together with the alternative funding sector than separately and banks need to get better at signposting.
The issue of signposting has been exercising me, and my alternative funding colleagues, for some time.
The issue lies in the fact that banks and other similar funding institutions are, quite understandably given the stringent regulations they now operate under, reticent to direct their customers to funding sources that could be deemed competitive or ‘different’, or that could be perceived as less-well regulated or higher risk.
The reality is, in fact, very different and is the reason why the non-banking, or alternative funding sector is currently seeing exponential growth in innovative areas such as peer-to-peer lending and crowdsourcing, as well as pension-led funding.
To be fair, in the post-crash years, the industry also saw a significant growth in quick-fix lending solutions which have not always been the best route and have, in some cases, led to financial disaster for businesses and individuals.
However, with the economy on a more stable footing, the FCA now up and running and the regulatory hawks circling the whole of the financial industry to keep it in line, the funding scavengers have been more or less picked off, leaving a healthy and innovative alternative funding sector.
As a result, collaborative solutions between alternative and traditional funders are starting to emerge, creating long-term, sustainable funding packages particularly well-suited to SMEs and with enough due diligence and regulation to foster and retain confidence for all parties involved. My opinion – and that of many of my alternative funding colleagues – is that the greater the collaboration, the better the outcome for all parties because the overall funding opportunities are greater.
But, there is still plenty of work to be done to really develop and exploit these opportunities. The banking sector is starting to recognise the complementary, rather than competitive, nature of alternative funding.
However, they remain reticent to join forces and appear reluctant to take on any new risks or consider new ideas while they remain under attack from the regulators, the public and the media for poor financial management.
In reality, collaboration with the alternative funding sector would probably have little or no impact on their capital adequacy targets and could help to boost their credibility with SMEs.
The government is, perhaps, best placed to dramatically alter the landscape and help change this mindset.
By establishing a funding ‘clearing house’, possibly using the interface of the much-promoted and soon-to-be-launched business bank, the government can signpost suitable alternative lenders which, in turn would generate positive pressure on the main banks to help find funding alternatives for businesses.
By taking the signposting responsibility away from the banks themselves, this structure would provide a safe framework from which banks can direct their customers and work collaboratively.
While this still requires some fundamental behavioural change by the banks, this ‘clearing house’, combined with better signposting, would give businesses – particularly SMEs – safe access to approved lenders, while helping banks keep UK businesses growing by encouraging innovative or complimentary funding.
Attitudes to business funding are largely based on people’s confidence, not just in alternative investors, but more importantly in the organisations they are backing. The ultimate innovation is to allow business owners and directors to borrow from themselves – in essence use their own assets to back the knowledge and confidence they have in their own businesses.
The ability to do this with the blessing and collaboration of their banks and traditional business advisors is the funding nirvana we should all be striving for.
Further reading on alternative funding