SME Funding – Challenging Banks or Business?
The UK's 'big five' banks have long been accused of not lending enough to the UK's small and medium enterprises (SMEs) but it seems now they might have an excuse. A new report has shown that, since the start of 2013, loan applications have dropped significantly. So what's going on behind the statistics?
The banks have made similar claims before (see the Project Merlin fiasco) but this time they have back up. The Federation of Small Business's “Voice of Small Business Index” shows there has indeed been a 3 percent drop in loan applications from SMEs compared to this time last year. However, the crucial question is what's behind this drop in demand? One company has an answer – but the banks won't like it.
The survey from Touch Financial found that, of the SMEs that applied for additional funding in the last six months, an astonishing 93 percent were turned down and left without vital funding. No wonder the banks are seeing a drop in demand when successful applications are this rare. The statistics unsurprisingly reveal that the vast majority of SME owners believe that UK banks do not support business.
There is also the argument that SMEs are finding alternative sources of financial support in the face of this lack of faith in the largest banks, but the Touch Financial survey shone the spotlight on this too. The survey uncovered the fact that, of those SMEs refused loans, 31 percent were given no reason for the refusal and 80 percent of all SMEs making applications were given no information about alternative sources of funding available to them.
There has, of course, been a reported increase in schemes such as group funding and peer to peer lending but there is perhaps a more viable and lesser known option that seems to be on the rise - “challenger” banks.
New banks to the UK, such as Swedish-owned Handelsbanken, the two year old Metro Bank, and Aldermore are promising a much better experience for the approaching-cap-in-hand business owner. Now that they have hit the public eye (mainly thanks to the Bank of England's Sir Mervyn King recommending them to disappointed business owners) their promises of better support are being tested.
The differences between the main UK banks and these challenger operations are according to the new banks themselves “continuity, personality and relationships”. The idea is that they rely on a dialogue based relationship system (aka face to face banking) and have almost-independently running branches rather than centralised decision makers. This lack of a central controlling office means that better informed decisions can be made rather than simply following a standard set of rules. The hope is that these differences will allow the new banks to offer faster, fairer loan decisions, financial advice and greater flexibility and consequently they will, hopefully, lend to more businesses.
At the moment these banks are too new to show whether their system is really working (there is a dispute over whether they will be any more risk-taking than established UK banks which is what many SMEs need) but evidence hints at a positive outlook so far. According to Handelsbanken they are rapidly having to expand to meet demand and are adding to their total of around 152 UK branches every eight working days. If nothing else, this must at least mean more businesses spread across the country will have access to their services.
However, with a recent survey by this organisation showing that the average cost of a start-up is £17,000 and costs are ever increasing, it is evident that any institution with the purpose of supporting business has its work cut out, especially in these financially lean and cautious times.
People4business will keep tabs on the progress of these challenger banks to make sure readers are up to date and, as of March, Chancellor George Osborne has promised he's creating a schedule for Cable's Business Bank plan so keep checking our news pages for the latest! If you have any first hand experience with the lending process at any of the new banks in town, or the main UK names, then we'd love to hear your story at email@example.com.
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