In the space of just one generation the borrowing landscape for businesses has shifted dramatically. Foreign banks, private debt funds, peer-to-peers and small specialist lenders have shaken up the market but left many SMEs understandably disorientated. Business owners sense they may be missing a trick by sticking with their high street bank but are failing to tap into new funding channels. CODE Investing’s Mark Collings reflects on an issue stifling many enterprises.
The latest British Business Bank (BBB) report on financial markets shows that around half of all SMEs consider only one lender when exploring finance. A very modest 5% actually manage a direct approach to lenders other than their own bank. Given our unquenchable consumerist drive in almost every other aspect of our lives this is surprisingly unadventurous. What’s holding us back?
The most decisive factor is a pre-existing relationship. This is a classic catch-22: newcomers cannot make inroads because they haven’t already made inroads.
Lack of knowledge also plays its part. The BBB points out that only around half of SMEs are even aware of peer-to-peer finance.
The physical presence of financial institutions (FIs) also plays a part. FIs are spread unevenly throughout the UK and even across cities. The better-served areas provide more specialist credit and – yes, even in the internet age – businesses in under-served areas are less aware of options and tend to miss out.
This hesitancy to access new funding lines matters. 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 might be because they recognise that their lender is in turn often afflicted by inertia: the bank is comfortable with customers’ current operations but doesn’t want to rock the boat with ramped-up trading. Sometimes human emotions stop business leaders from asking for money: it’s not an easy thing to do and can be embarrassing if given a rejection.
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, but time, effort or knowledge keep them out of reach.
Indeed, it’s easy for a business to take on inappropriate credit facilities if it doesn’t know its way around the finance market. Money is famously the least differentiated of all products: one pound coin is the same as the next one, 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, covenants and expectations of returns. Matching your needs – especially on pricing, term, structure and security – with the lender’s 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 is busy with the day job? Doing your own research, actually reading financial marketing material and accessing government information (and the above-cited British Business Bank) will all help.
CODE Investing 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 from across the whole market. But however it’s done, there’s a new and dynamic world of finance offering greater choice than ever before, and the business community can only be stronger by taking full advantage of it.
Contact the team at CODE Investing;
020 3923 3373