UK small businesses need new forms of funding – can the alternative finance industry step up?

Net lending to Small and Medium Enterprises has fallen, highlighting the desperate need for new forms of finance for small business.



Manisha Jha

Manisha Jha

New Blood Journalism Intern at The Leasing Foundation
Manisha has seven years’ experience in financial journalism in Mumbai, New Delhi and Chennai writing for The Hindu, Asian Age and the Hindu Businessline. She received the Marjorie Deane Financial Journalism Scholarship from the Economist, and was selected for a IMF/Thompson Reuters workshop on economic reporting. Manisha has reported on markets, M&A, investment banking, property, IT and banking, all using social media and web tools to research and break market-moving stories.
Manisha Jha

Introduction from Editor PETER THOMAS

In January 2015 we appointed Manisha Jha, City University postgraduate student Manisha Jha (uk.linkedin.com/in/jhamanisha) as the inaugural New Blood Asset Finance Journalism Intern. 

The Leasing Foundation New Blood Asset Finance Journalism Internship is intended to start a wave of professional journalists working to keep the world informed, educated and aware of the financing landscape. The focus is on modern, online, data-driven, meticulously-researched, insight-based and impactful journalism in leasing and asset finance. The aim of the programme, funded by Roger Skinner, CEO of Maxxia, is to support emerging young, technology-oriented, well-informed journalists like Manisha who will create stories about the industry that will be read by global audiences beyond the industry itself. Manisha will learn directly from the experts, write stories that inform and educate about the leasing and asset finance landscape and so help us accurately frame public and political debate.

Roger Skinner, Maxxia’s CEO, says “The Maxxia business approach is based on transparency, collaboration, trust and building real relationships. I want to ensure that these values, and the great contribution that the leasing and asset finance industry can and does make to supporting economic growth, is reported accurately, intelligently and with real purpose so that all businesses and communities gain a greater understanding of the role that the industry plays. The New Blood Internship is our way of doing that.”

Manisha has seven years’ experience in financial journalism in Mumbai, New Delhi and Chennai writing for The Hindu, Asian Age and the Hindu Businessline. She received the Marjorie Deane Financial Journalism Scholarship from the Economist, and was selected for a IMF/Thompson Reuters workshop on economic reporting. Manisha has reported on markets, M&A, investment banking, property, IT and banking, all using social media and web tools to research and break market-moving stories.

This is one of a series of stories that Manisha is creating in collaboration with the Leasing Foundation Fellows, Governors and other industry experts, that explore the changing landscape of leasing and asset finance. Please read her work, and contact Manisha with other stories that she might work on at manisha.jha@leasingfoundation.org

Who should be interested in this? Anyone interested in current developments in the leasing and asset finance industry.

 

UK small businesses need new forms of funding – can the alternative finance industry step up?

 Net lending to Small and Medium Enterprises under the Funding for Lending scheme dropped for the fourth consecutive quarter of 2014 by £81M – taking the total decline last year to about £2bn and highlighting the desperate need for new forms of finance for small business.

Funding for Lending – has it worked?

The UK government’s £900M boost to SME financing and extension of the Funding for Lending Scheme has further continued to put the spotlight on the funding gap for small businesses in the country.

The Funding for Lending scheme, started by the Bank of England in July 2012, was aimed to provide banks with access to cheap capital from the government in order to facilitate lending to UK SMEs. But has it worked?

Roger Skinner, CEO of asset finance and leasing company Maxxia, says: “Despite the extension of the FLS independent asset finance firms have been unable to benefit, as banks and their asset finance companies are not able to pass the value of this interest rate subsidy to these market players.”

The role of alternative finance

While it can be argued that the figures show SMEs continuing struggle to raise finance for growth, they also reflect a commercial opportunity for non-bank lenders and the alternative funding industry to step in and fill this void.

Increasing awareness about new funding sources and the changing business environment has led to a rise in demand for options such as leasing, peer to peer lending and crowdfunding. Peer to peer lending has trebled in the past year but still is only 1 per cent of the £25bn lend to SMEs in the first half of 2014.

Traditional bank lending remains the predominant source of finance with SME lending in the UK presently focused on four major UK banks accounting for almost 90 per cent of business loans by volume. This figure underscores the need for more diverse and vibrant supply of finance reflecting the growth and risk profiles of individual businesses.

High street banks have long lost touch with their SME clients” – Roger Skinner, Maxxia

Making a case for asset finance companies to step in place of high street banks, Roger Skinner believes these companies are better suited to serve and understand the needs of SMEs and can provide access to the vital infrastructure SMEs need in order to survive and thrive.

“High street banks have long lost touch with their SME clients and are finding they just don’t have the time, and in some cases the inclination, to know their customers anymore. And, contrary to popular belief, assets can be financed in a cost effective, transparent manner through asset finance companies,” he added.

Recent research by independent invoice finance provider Bibby Financial Services who talked to 1,000 UK SMEs, found that one-third were considering a change of business funding provider, citing a lack of flexibility and poor customer service among banks as the top reasons for moving.

Small firms continue to report that bank credit is either refused or offered at high prices by major lenders owing to the perception of risk associated with small businesses. On the other hand, non-bank lenders have the freedom to step outside the traditional pattern of lending. By building solutions around the needs of a business, they can inject cash quickly into the supply chain to help overcome cash flow shortage and satisfy a client order.

The Small Business, Enterprise and Employment Act – a potential game changer

According to the British Chambers of Commerce, 54 per cent of UK companies, a majority of which are SMEs, expect to step up hiring over the next 12 months. At a time when bank lending to the sector is shrinking how will this expansion be funded? Alternative business finance could be the answer – and the recently enacted Small Business, Enterprise and Employment Act – a potential game changer.

The Act proposes legislative action to match SMEs rejected for funding from their bank with alternative finance providers and also requires banks to share small business data with these providers therefore significantly opening up the market. Pointing businesses to a greater range of funding solutions could make the SME lending market more competitive and improve opportunities for growth.

With the UK economy recording its ninth consecutive quarter of growth, the importance of smaller businesses to this shaky recovery would be significant as small firms accounted for 99.3 per cent of all private sector businesses in the UK, 47.8 per cent of private sector employment and 33.2 per cent of private sector turnover in 2014 as per latest statistics compiled by the Federation of Small Businesses.

Given the SME sector’s status as an indispensable cogwheel in UKs future economic growth, will recent government intervention by way of additional lending support and a new legislation help it rise to its full potential? Can the alternative lending industry really deliver on its promise?

CC BY-SA 4.0 UK small businesses need new forms of funding – can the alternative finance industry step up? by Manisha Jha is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.