Why bank funding is no longer the default option for growing SMEs
Gone are the days when SMEs raising finance automatically regarded the bank as their first – and often only – port of call. The development of alternative finance has given growing businesses access to a much broader range of funding options, with flexible and bespoke solutions to their individual needs.
Statistics from the Asset Based Finance Association suggest that alternative lenders are providing more funding to SMEs than ever before. In the first quarter of this year alone, SMEs raised £711m from the sector according to the ABFA, a 60% increase on the same period of 2015. The sector’s total lending to SMEs now stands at £19.3bn.
Don’t assume that these figures reflect a failure by the banking sector to make funds available to SMEs; while access to finance was a problem in the wake of the financial crisis, as banks withdrew from lending to SME customers, this has become less problematic in recent times. In fact, the increasing use of other types of business finance reflects a heightened awareness amongst SMEs that they do have funding options other than what’s available from the banks – and also that these new approaches have some particular advantages.
Those factors can be seen clearly in Close Brothers’ own research into SMEs’ attitudes towards alternative finance. More than one in two SME managers (52%) are now aware of options beyond traditional banking according to the latest Close Brothers Business Barometer, with the figure rising to three in four (75%) amongst CEOs.
That is feeding through into take-up. For example, 12% of SMEs in the Business Barometer are already using invoice finance, while a further 46% say they would consider doing so if and when they need to raise finance.
Moreover, SMEs have very positive reasons for considering a wide array of funding solutions; they’re not turning to the sector because they’ve been turned down for credit by the banks – rather, SMEs increasingly recognise that tailored and flexible asset-backed or invoice finance funding arrangements may serve their needs better than a very standard bank loan or overdraft.
In Close Brothers’ research, 34% of SMEs which said they would use invoice finance pointed to the speed with which it could give them access to funding; 18% said they expected it to be cheaper than other types of funding; and 15% were attracted to its simplicity.
These benefits are part of the reason why groups such as the Federation of Small Business and the British Chambers of Commerce are keen to promote a more diverse range of financing options – in one recent initiative, for example, the FSB and the BCC combined to promote better advice for SMEs looking for funding.
That may become even more important in the wake of the UK’s vote to leave the European Union: Close Brothers’ research, conducted after the Brexit vote, found almost a third (30%) of SMEs expected the referendum result to have an impact on their access to finance. Amongst CEOs, that figure rose to 52%.
However, the evidence of the financial crisis is that it is bank funding that is most likely to be adversely affected by market turmoil and economic upheaval. Alternative finance, by contrast, flourished following the credit crunch. With support from SMEs that already see the sector as offering a competitive threat to bank funding, the rise of alternative finance looks set to continue.