Business borrowing in a brave new world
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In the space of one generation the borrowing landscape for businesses has shifted dramatically.
Foreign banks, private debt funds, peer-to-peers, fintech disruptors, and niche lenders have revolutionised the finance market but left many SMEs understandably disorientated. Entrepreneurs sense they may be missing a trick by sticking with their high street bank, but often don’t have the confidence to tap into the new funding channels.
The latest British Business Bank (BBB) report on finance markets shows that around half of all small businesses seeking funding consider only one lender. A very modest 5% actually manage a direct approach to lenders other than their own bank. Given our unalloyed consumerism in almost every aspect of our lives, this seems surprisingly unadventurous. What’s holding us back?
The most decisive factor when SMEs choose a lender is having a pre-existing relationship. A classic chicken-and-egg situation then: newcomers cannot make inroads because they haven’t already made inroads.
Lack of knowledge also plays its part. The BBB highlights the fact that only around half of SMEs are aware of peer-to-peer finance (platforms for private investors to lend to business in case you’re in that half).
Lastly, the physical presence of financial institutions is uneven throughout the UK and even across cities. The better-served areas unsurprisingly provide more specialist credit and – even in the internet age – businesses in under-served areas are less aware of options and can miss out.
SMEs’ hesitancy to access new funding lines really does matter. It means established lenders can rest on their laurels and rely on their customers’ inertia. Banks are no different from utility companies in punishing loyalty with increasingly uncompetitive pricing if they can get away with it.
Another unfortunate consequence of restricted credit access is stunted business development. Growth is the most common reason for seeking finance but three-quarters of SMEs compromise on their expansion aspirations because they shy away from borrowing. This is perhaps because they recognise that their existing lender might not have the risk appetite to support accelerated trading.
A third outcome of narrow finance focus is over-reliance on suppliers’ finance. Businesses often fall back on expensive credit arrangements from vehicle or equipment manufacturers when more cost-effective solutions are available on the market.
Indeed, taking on inappropriate credit facilities is very easy if a business doesn’t know its way around the finance market. Money is famously the least differentiated of all products. My pound is the same as your pound, so by extension a loan of £1m from Peter should be just as welcome as a £1m loan from Paul.
Of course this is far from the case as lenders have different priorities, working models and expectations of returns. Matching your needs with the lender’s – especially on pricing, term, structure, and security – is vital if the credit line is to tie in with your business plan rather than hamper it.
So how can SMEs improve their access to the full breadth of the finance market when everyone’s busy with the day job?
Doing your own research, lingering over financial marketing material longer than usual and accessing government information and the above-cited British Business Bank will all help. CODE might also at this stage cough discreetly and point out that our reason for getting up every day is to match SMEs with the right lender.
However it’s done, there’s a new and dynamic world of finance out there and the business community can only be stronger for taking full advantage of it.
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