The chancellor’s Summer Budget took the heat off small businesses by lowering taxes, increasing the National Insurance employment allowance and setting the enhanced Annual Investment Allowance at £200,000. Some corners condemned the National Living Wage, while others praised the chancellor for improving the NI allowance which will encourage micro businesses to take on additional employees.
While measures to unlock cash were a key – and right – focus of the budget, the issue of accessing additional funding was noticeably missing. As a small business lender, of course I’d think that. But let me tell you why.
As a small business ourselves, we know first-hand that time and money are the two most common barriers to growth. A business is only able to grow when it has access to the right resources. In a recent independent survey we conducted, 42% of small business decision makers said a lack of working capital was detrimental to business growth. A quarter (26%) agreed their growth has been restricted due to lack of access to cash from traditional lenders or an unwillingness to lend[1].
It’s not just us who think so. In its pre-budget submission, the Federation of Small Businesses (FSB) drew up a series of requests to ensure the government keeps strengthening the working environment for small businesses. Of all the key points, a study by the Federation found that 28% of small businesses wanted the government to focus on the issue of access to finance.
As a result, the FSB has requested an increase of competition in the business banking market and improved credit data sharing, which will allow e-lenders such as Everline – who rely on real-time data to make fast and fair lending decisions – to open up funding to more and more good small businesses. The FSB also called on the Chancellor to consider initiatives such as credit ‘passports’.
Time for ‘alternative’ to become the mainstream
Primarily because of their lengthy and manual approach to underwriting loans and the requirement for many documents or ‘site’ visits, it’s not commercially viable for most traditional lenders to underwrite small business loans under £150,000. The process is the same regardless of loan size so the reality is they are geared towards big businesses and bigger loan sizes of £150,000 or more.
Banks need to quantify at least six key components when determining the cost of a small business loan: origination, underwriting, loan review, operations, monitoring and collections, and compliance.
If the same process and lending criteria is applied to lending £500,000 as it is to £50,000, for example, it’s clear that small business loans just aren’t viable for most traditional lenders due to the high costs. Unless they cross-sell products of course, which is the reason many banks ask for businesses to transfer all their banking to them as a condition of taking a loan. This ‘switching of banking’ also means the true overall cost of a loan to the business is much greater then just the interest and fees.
I’m not out to bank-bash, though. In fact, we see our service as complimentary to traditional lenders, where we’re able to use our smart lending platform to underwrite at a fraction of the cost and to offer their business customers convenient access to the working capital they need, for as long as they need it, without changing all their banking arrangements.
Their business customers are happy with the referral, the banks don’t have to offer unviable loans and – crucially – they get to retain their business customers for other, more mutually suited services. The really smart providers might even choose to reflect the opportunity of not writing loss-making loans back into the pricing of their mainstream products to further support their business customers.
How to change the default setting
While more and more businesses are aware of the benefits of alternative finance, there still remains a lack of knowledge of the sector that means banks are still the default for the majority of small business owners when it comes to sourcing additional working capital. Banks have been the only choice for a long time, and, in comparison, the alternative lending market is fairly new. But, non-traditional lenders are coming of age and the business world is waking up to the advantages of these sources of finance.
Financial institutions, industry bodies, accountants and the government all have a role to play in ensuring businesses know the funding options available to them and that traditional banks are no longer the default. These measures – combined with the cost-savings announced in the Summer Budget – will pave the way for a stronger economy, a stronger workforce and a stronger entrepreneurial environment.