As the alternative finance sector continues to grow at a rapid rate, Paul Mildenstein considers if banks have had their day.
The gap in bank lending was the key driver in the innovation and growth of the alternative finance sector and while lending figures involved are small in comparison to the sums lent to small businesses by banks, the numbers are sizeable.
More significantly though is the speed at which the sector has grown. It lent some £1.74 billion last year, double the amount compared to 2012 and is on course to lend some £4.4 billion this year. Recent research by the Funding Centre shows there are now 108 alternative finance platforms.
Although larger companies are again beginning to access the finance they need, the banks still aren’t lending as much as they did pre recession to small firms, and it’s unlikely they ever will again. Net lending to SMEs under the Funding for Lending Scheme in 2014 fell by £3 billion. For many, especially, young and new businesses, the bank door remains firmly shut and for those that do approach them, the rejection rate is estimated to be 50 per cent. A good proportion of these are actually viable and are rejected simply because they don’t meet the risk profiles of the largest banks.
And it’s about to get worse. Draft legislation put forward last month by the Basel Committee on Banking Supervision could further reduce the number of small businesses that receive bank funding quite significantly. The Basel rules require that banks treble the amount of security needed for a small company to borrow money in order to reduce banking risk. When a bank needs to provide £30,000 to cover risk for a £10,000 bank loan, it’s just not cost effective.
Whilst this is another hit for small businesses at least there’s a safety net in the form of the government’s new referral initiative mandating banks to signpost rejected customers to alt-fi providers. Due to start later this year, the government is currently selecting partners to help deliver the scheme which could see £2 billion more funding being injected into the small business sector. For it to be successful, it’s imperative that it’s implemented effectively by all involved and, importantly, monitored and measured by the British Business Bank, which is responsible for overseeing it.
Banks are in a unique position because they hold the transaction accounts of the UK’s businesses and as such have unrivalled access to data and business health. Small businesses will always need banking facilities and services to deposit money and manage cash flow, but when you look at what else banks offer, small businesses can get those services and products from many other sources, often more cheaply, easily and quickly.
The fact is, banks have become less relevant for small businesses. Advances in financial technology and inventive and open minded new lenders have brought efficiencies and convenience to the way small businesses can access financial services and products never seen before.
Paul Mildenstein is CEO of small business funder Liberis.