Although there are an increasing number of funding options available for SMEs in the UK, the reality is that business lending remains highly concentrated and that many small businesses aren’t aware of the non-bank options available to them.
Indeed, in its Small Business Finance Markets report published earlier this year, the British Business Bank conceded: “whilst levels of awareness have improved, in particular for newer types of finance, it is striking that over half of UK smaller businesses still go only to their bank and do not shop around for finance.”
There’s also evidence to suggest that many SMEs rejected for finance, don’t continue their search, assuming that a “computer says no” answer from a traditional lender is the end of the road.
The basis for data sharing
Several organisations have called for greater data sharing, including the Office of Fair Trading and the Competition Commission, which both suggested that a lack of information about the creditworthiness of SMEs has been a major barrier to competition in the SME funding market.
For these reasons, new rules that came into force on 1st April 2016 were announced with the aim of improving the provision of finance by enabling the sharing of data between funding providers.
The Government itself said that its data sharing scheme would “make it easier for new challenger banks and alternative finance providers to check credit worthiness of potential business customers” to improve the chances of them being able to provide finance to SMEs.
Based on the assumption that this data is lacking, the rationale stacks-up. However, in my view a lack of credit data was never the primary issue.
Just as you can’t judge a book by its cover, you can’t judge an SME by its credit score alone and funders naturally prefer to make decisions based on source data and their own risk assessment – not those provided by banks or Credit Reference Agencies (CRAs).
But even before the application stage is considered, alternative funders need the opportunity to make such decisions and this is where Government Policy is welcome.
The announcement in this year’s Budget to designate Bizfintech, Funding Options and Funding Xchange as finance platforms under the SME Finance Platforms regulations is a good example of Policy that will help to level the playing field between the established high street banks and the specialist capabilities of alternative funders.
The designated platforms will match bank rejected SME applicants with alternative funders – in theory increasing the chances of SMEs being directed towards a funder who can help. I hope that they act impartially and that this doesn’t just enable new “closed shops” to develop.
In my view, the Government should concentrate its efforts on getting this referral scheme up and running fairly before turning its attention to the provision of data between funders and CRAs.
While it’s encouraging to see Policy towards SME funding coming to the fore, it’s important that underlying challenges are tackled – such as the lasting notion among many SMEs that bank lending is the first and only port of call in helping businesses to access the finance they need to grow.