Feature

How much SME demand is there for alternative finance?



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Banks approved eight out of 10 applications for SME finance during Q2 2018, according to the latest figures from UK Finance.

UK Finance’s SME update for Q2 2018 also found that 69,300 new SME loans were approved by banks for a value of £7.1bn. 

The figure was much higher than the £15m that the bank referral scheme has provided to SMEs since it launched almost two years ago.

How much demand for alternative SME finance is there? 

Despite the 80% approval rate by banks in Q2, Colin Goldstein, head of strategic partnerships at iwoca, said one of the biggest challenges for a growing small business was securing credit.

“Demand for SME finance is strong. 

“Attempts to dissuade business owners from accessing finance – through convoluted forms, long waiting times and unfairly rigid lending criteria imposed by the banks – are driving SMEs away from making applications. 

“Making access to capital seamless and hassle free, relieving owners of the burden of extra financial paperwork and eliminating wasted time will see SMEs regain their confidence.”

John Davies, director at Just Cash Flow PLC, added: “Undoubtedly, Brexit speculation and the accompanying doom and gloom predictions are causing a lot of uncertainty and this isn't good for business confidence. 

“However, we have seen record levels of applications in both July/August and SMEs now seem to be saying politicians will do what they do, but we have to get on with running our businesses.”

Greg Carter, CEO at Growth Street, felt initiatives such as the government’s bank referral scheme had been stymied, partly because it was designed to only refer the SME owners whose loan applications were declined.

“We need to ask ourselves: what happens to the SMEs who don’t even get as far as applying, either because they don’t understand the full breadth of financing options available to them or because they might assume a big bank won’t understand them?”

Attract

How can alternative lenders attract SMEs? 

“The fact is that, in the UK, SMEs are underserved by the main banks, and the opportunity for the alternative lending market is, and will remain to be, substantial,” said Chris Gardner at Amicus Finance.

Zuhair Mirza, principal at Avamore Capital, added: “We look to provide a greater degree of flexibility in the way we underwrite, we move quicker than banks do and in many cases we provide more leverage, either in a loan-to-value ratio or on a loan-to-cost basis. 

“Alternative finance lenders are prepared to focus just on the asset or development and often overlook the broader factors which would impact the loan from a bank.”

However, John didn’t believe that it had ever been the case that alternative lenders were looking to take business away from traditional lenders. 

“What we provide is a complimentary service that recognises [that] SMEs need different forms of finance at different stages of their development.”

Kevin Vendel, head of sales at Spotcap, agreed, adding: “Spotcap’s approach doesn’t involve taking business away from the banks, but rather offering an alternative product to give companies more choice. 

“In addition, we’re currently in various partnership discussions with traditional institutions as well as alternative lenders and believe that this, ultimately, will bring unsecured finance to even more businesses.”

Is there too much competition in the SME alternative finance market?

Is there too much competition in the SME alternative finance market? 

Jon Maycock, managing director of asset finance at Hampshire Trust Bank, felt competition was a good thing for SMEs in the UK.

“It provides them with choice and ensures lenders need to be on point in delivering customer service and good customer outcomes. 

“However, as an industry, we need to be certain that we don’t lose our pricing and risk disciplines. 

“There is certainly evidence that some lenders are mid-pricing risk to achieve customer growth.”

Colin added that competition could be crucial to spurring the market to innovate.

“By competing with the banks in the wake of the financial crisis, alternative lenders have developed products and services that make finance available to small businesses in need within hours instead of weeks. 

“We’re bridging a gap that has previously left SMEs struggling to obtain credit from traditional banks.”

Kevin felt that the number of lenders in the UK seemed to have plateaued and the industry had now set its focus on refining existing products.

“This has resulted in varied, well-developed offerings that cater to a range of situations. 

“With so many small businesses operating in the UK, there’s plenty of business to share, and in a way that best suits businesses’ needs.”

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