The old guard of lenders, pre-occupied with repairing balance sheets, is not serving UK SMEs as they should. According to innovation charity Nesta, demand for alternative sources of finance grew by 91% between 2012 and 2013 in the UK. The British government has started to take note, reports Jason McGee-Abe.
There is a damaging disconnect between credit-hungry SMEs and traditional sources of finance, one which is impacting the UK economy and stifling the government’s economic recovery plans.
The Office of National Statistics reports that UK exports for April 2014 were at £23.5bn, a decrease of £3.6bn compared to the previous month. Moreover, the latest data from the British Bankers’ Association (BBA) shows that UK businesses borrowed £2.3bn less in April, with net lending at £275bn, the biggest drop since last July.
Deflationary impacts of the eurozone have meant that British exporters are increasingly looking to emerging markets to facilitate growth, and for this, they’ll need more access to financing. But as a result of the hangover of the financial crash, these companies continue to be starved of working capital.
This has stoked the demand for alternative sources of finance, and there are now a myriad of new, innovative products and services that can help quench the thirst of SMEs.
The small business bill
The UK Budget 2014 gave SMEs a glimmer of hope for their capital needs and in the Queen’s speech at the State opening of Parliament, the introduction of the first small business bill, The Small Business, Enterprise and Employment Bill, marks the next step in helping to create greater access to funding and a fairer marketplace for small businesses to operate in.
It has also opened the door, in the shape of a consultation, for rejected banking referrals to be matched with alternative lenders.
“Legislation will be introduced to help make the United Kingdom the most attractive place to start, finance and grow a business. The Bill will support small businesses by cutting bureaucracy and enabling them to access finance,” the Queen stated.
The government is now analysing whether it should legislate banks to refer details of SMEs that have been rejected for loans by them to a platform, or platforms, so that they can be accessed by challenger banks and other alternative funders.
Further legislation sought includes improving access to SME credit data, which will enhance the ability of alternative finance providers to conduct accurate risk assessments, and make it easier for SMEs to seek a loan from another lender.
Hardly surprising, this move has been met with intense opposition from banks guarding ownership of customer relationships. But, viable SME borrowers, most of which only approach the largest banks when seeking finance, are being rejected by these institutions, with first-time borrowers experiencing a rejection rate of 50%.
Reacting to the news, Edmund Truell, group CEO of Tungsten Corporation, says: “It is high time the government addressed the issue of SME finance… The stock of lending to SMEs fell in 2013 for the fourth consecutive year, and when one considers that SMEs account for over 99% of UK businesses and nearly 60% of private sector jobs, it is quite clear how crucial this issue is.”
In light of the latest Federation of Small Businesses’ (FSB) Index, which reports that almost two thirds of small firms expect to grow over the next 12 months, exporting is now the biggest growth area for 19% of the UK’s 4.8 million SMEs.
The FSB report also shows that 68% of those who currently export saw export sales increase in 2013 on the previous year. From those that do export, 74% have business plans in place, of which 85% said increasing exports was very much part of their strategy.
But SMEs aren’t the only ones with ambitious plans: chancellor George Osborne is planning to get 100,000 more British businesses exporting, reaching £1tn of exports by 2020. There is serious pressure on the government agencies, UK Trade and Industry (UKTI) and UK Export Finance (UKEF), now to do more and ensure that SMEs have all the know-how and tools to take the next step in their business growth.
Export growth will need to triple in the next six years for the government’s 2020 target to be reached. Head of trade credit UK at AIG and chairman of the trade credit committee at the ABI, Will Clark, says: “I am concerned about the lack of exporters using these services, especially UKEF.”
“The fact that so much money, time and energy has gone into these campaigns – the Great Britain campaign, UKEF – I’m wondering whether they are targeting companies in the right way,” adds IOE director-general Lesley Batchelor.
It certainly is a steep challenge, especially when looking at the latest UKEF annual figures. The ECA provided £2.3bn of support for UK exports in the year ending March 31 2014, a drop of £2bn on the preceding year. UKEF has since partnered with the British Chamber of Commerce and launched a number of products, so the foundations are being laid, although they have been plagued and delayed by governmental red tape.
It is likely that the UK will miss the ambitious export target, equating to a 10% year-on-year growth rate, unless steps are taken to secure markets in faster-growing emerging markets.
At GTR’s 2nd Annual UK Trade & Export Finance Conference, delegates from the leading trade, export and supply chain finance sectors took part in an audience poll on the development of alternative finance.
SMEs present were asked whether they see themselves as being sufficiently informed about alternative finance, and 72% voted a resounding ‘no’, with 52% of those SMEs calling for the implementation of an online resource that provides a complete database of options.
When asked: ‘Do you feel suitably informed about the offerings of UKTI and UKEF?’ 69% of delegates voted ‘no’.
Looking at the barriers to exporting, it is clear that education is still very much lacking. When asked: ‘Which of the following is the biggest barrier to exporting from the UK? Access to finance, international connections, regulations, knowledge of markets?’ the vote went to ‘knowledge of markets’.
This is a clear sign that although steps are being taken to increase access to finance, educating the sector on the financing options available to them is something the government needs to make sure is fully established.
The onus is also on SMEs: the need for finance directors to become savvy about government and funding opportunities is now more than ever imperative to their success.
Resources are available for SMEs that want to find out which product is best suited for their business. Platforms such as Alternative Business Funding and findSMEfinance are already collaborating for businesses to gain access to alternative finance. Commenting on crowdfunding and peer-to-peer lending specifically, John Cridland, director-general of the CBI, states: “We need to nurture the UK’s vibrant alternative finance market and encourage even more competition in banking so that businesses can get growth capital.”
UKTI and UKEF also need to be more effective sources of intelligence on new opportunities in overseas markets, such as producing a joint roadmap on how to offer more help to SMEs that want to export to emerging markets.
With calls from the Bank of England to slow down the Help to Buy scheme, as speculation arises about a UK housing bubble, there have been calls for the government to reroute that funding and invest more in export lending and the support structure for businesses.
The Small Business Bill has been published, and will now be followed by a second reading, committee and report stages and third reading of the bill in the Commons before it reaches the Lords and completes its passage through both Houses by March 2015, in time for the general election. GTR will continue to monitor its progress.