Should you loosen your belt when you’re on a diet?

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Brexit relatedI have mixed feelings about Mark Carney’s speech yesterday, when he announced that the Financial Policy Committee would ease banks’ capital requirements, encouraging them to lend.

Relaxing capital requirements to ease funding availability for individuals and SMEs may work. It’s a bit like targeted QE and if we can stabilise sentiment and continue growth with a weaker pound, it may prove a masterstroke.

But I can’t help the nagging feeling that it’s a bit like the morning you wake-up after over-eating and loosen your belt or put on a size larger pair of trousers. You immediately feel comfortable but there is a little voice telling you that it’s not the solution.

So, why not?  The Bank of England frequently tell us that our banking system is better capitalised than before the financial crisis and, in the case of the very large banks, that is undoubtedly true.

What about newer, challenger banks though?  Despite ongoing lobbying to create a level playing field, many challenger banks – asset class dependent – have similar tier one capital ratios to the behemoths. And yet their portfolios are inevitably less well spread and consequently could be riskier. This is particularly the case in relation to commercial mortgages and risker forms of lending.

I was told recently by a policy maker that a “managed failure” would be good thing and that it would prove the strength of the system. This may be true. Only time will tell and a full economic cycle will be needed to judge, but I wonder whether industry commentators will be so sanguine come the day?

The purpose of a stronger capital ratio is to absorb more losses in a downturn and thereby protect depositors. To loosen capital ratios at a time of potential downturn appears at first blush to have the potential for increasing the risk to depositors.

So, is the risk actually higher? Well, in the market I see most of (SME funding), I have been warning about overheating for some time due to a swath of newer, online lenders flooding the market in recent years.

We are seeing larger cash advances, lower pricing, weakened covenants and weaker security. I’ve warned before that this will end in a bust of sorts. This isn’t to say that some of these online lenders won’t  survive and do well, but it’s a good bet that some won’t.

In my view, this was going to happen regardless of the Brexit fall out – it’s a clear case of supply exceeding demand. But will the issue become compounded now the Bank has increased supply? Maybe.

Now we have loosened our belts, the world suddenly looks a little brighter and it seems as though we have room to grow. I guess the worry is that when we expand up  to the next notch on the belt, our diet will need to be even more extreme and the correction in SME funding (and lending more broadly) may be even harder on the economy.

It is possible that the Bank have genuinely reinvented the way our economy and its banking system works, but decades of market experience lead me to be cautious.

The unholy Trinity?

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It would be tempting to blame Brexit for any forthcoming downturn, but its roots run deeper. The Government seem hell bent on increasing home ownership again. Probably because it brings with it increases in Conservative votes.

So, it was with some surprise that we witnessed the Chancellor attack its existing supporters by increasing the stamp duty on Buy to Let purchases, reducing the tax efficiency of such purchases and complicating the taxation process too. If that were not enough, the Bank Of England has recently weighed in to try and stem the growth in Buy to Let by restricting people’s ability to borrow.

Why should we worry about this?  Cast your mind back to the financial crisis. It is possible to make a case that the problems were exacerbated because the Treasury, the FSA and the Bank of England openly disagreed on policy on a regular basis. This “trinity” governed our financial response to the crisis.

Despite a different sharing of power not much appears to have changed. They may get on slightly better but the FCA, Treasury and Bank still appear to communicate ineffectively with each other.

So, just when the Treasury and the Bank are effectively thwarting buy to let, the FCA are busy making it harder for people to take out mortgages. The new affordability checks are rational and may well stop the excesses we have seen before but they still have the effect of choking off demand.  People therefore need to rent. Couple the inability of some to buy or maybe now to even rent and we risk a structural shortage of housing being transformed into falling house prices. That is quite some trick to pull off!

The current greenfield development binge in Southern England is not just laying waste to the countryside but it is exposing builders to the vagaries of demand. Surely, with pent up demand they can’t lose can they?  Well if the Trinity have their way they just might. All of this might not matter if SMEs weren’t gearing up to support growing demand and if we hadn’t just voted to leave the EU. We could see a house price fall start a recession.

It is time our Trinity started to talk to each other.

SME data sharing

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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.

Bibby beats banks to top factoring table for SME funding

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Earlier this month, the business finance publication, Business Money, published its annual receivables review league table, showing Bibby Financial Services as the market leader in relation to factoring assignments for 2015.

What this means is that we funded more debt than any other Factoring provider, freeing up our clients’ cashflow and helping them to grow.

We were also ranked second in terms of client numbers, seeing growth during a time where most other invoice financiers in the top ten saw a decline in the number of businesses they support.

It’s been widely reported that the landscape for SME finance has changed significantly since the end of the financial crisis. Asset based finance providers have taken on a bigger role in the funding of SMEs as the banks have tended to retreat from the market, due to tighter liquidity and capital requirements imposed following the financial downturn.

As a funder with a rich history of financing SMEs over 34 years and as part of the 200-year-old Bibby Line Group, it’s often been said that we have the expertise and financial backing to compete with bank-owned invoice financiers. But what Business Money’s receivables review reveals is significant. Not only are we competing with the banks’ invoice finance arms, we’re the first non-bank funder to lead the industry for a generation.

A relationship-based approach to funding

Throughout 2015, we continued to operate alongside a small band of established financiers that were able to grow their funding support in the face of new, online competition. We take a relationship-based approach to funding and – while we continue to invest in technology to enhance the way in which our clients can access the funding we provide – the service we offer is based on the relationships we have with the businesses we support.

We take a human approach to assessing risk and work hand-in-hand with our clients and intermediary partners to ensure that they have access to local decision makers and relationship management teams. In my view, it’s this that sets us apart from other funders in this space and is the reason for our continued success in the face of new competition.

While we have long been associated with funding smaller SMEs, in recent years – through the expansion of our product portfolio and formation of our Corporate Finance team – we now support businesses of all shapes and sizes across more than 300 industry sectors.

Examples like our funding for global car-care manufacturer, Turtle Wax; leading distributor Ripmax and more recently our support for investment company Valtegra’s acquisition of two UK-based manufacturers, demonstrate our capability in the Corporate financing space.

Today, through our growing product portfolio, including factoring, invoice discounting, lease finance and specialist finance for the construction and recruitment sectors, we support over 7,000 UK businesses. And with the launch of our new Foreign Exchange proposition to existing clients, this year, we’re continuing to bolster our support for UK PLC.

These results are testament to the commitment, drive and tenacity of our teams throughout the country, in addition to the support we continue to receive from our intermediary partners. This has taken us over 30 years and it’s been a great journey so far. I am excited about the future and for this reason, I’d like to offer a personal thank you to all our staff and partners for making this possible. Here’s to the next milestone.

Transactional funding and the art of building relationships

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We’re living in a time of exciting change where the word “digital” is on many lips. A recent internal presentation from IBM declared that “digital disruption has already happened” given that Uber is the world’s largest taxi company without owning any taxis and Airbnb is probably the largest accommodation provider without owning any properties. What sets these digital services apart is that they do not seek to replace people with technology. They simply utilise technology to enable consumers and providers to connect more easily.

So, how does this digital world impact the SME finance market?  There is a common view that SME owners are happy operating digitally and received wisdom goes that digital means no people, no relationships and a world where everything is rational and transaction based. But the SMEs I speak with value the relationships they have with their funding partners and ask that they’re not kept at arm’s length through digital means.

I believe that successfully funding businesses and helping them to grow in the long term is  much more about relationships than transactional lending. For funders such as Bibby, it’s about taking a relationship-based approach to supporting our clients. Of course, this means providing innovative and up-to-date systems to support this, but it also requires personal communication – the kind a machine built solely for transactional interface simply can’t perform.

But for now it seems that many technology platforms see the trajectory as heading towards a more formalised model of online lending that involves less people.

What I sense is that when a company uses digital means to enable greater people contact in a way that is easy and simple, prospective clients will be happy to embrace the change. The implication for me is that this will not be a ‘rules based’ or ‘tick-box’ approach  but rather, it will need to embrace the flexibility of decision making based on the experience of people, facilitated by technology.

Understanding your customer and their needs is as important as ensuring the right level of funding arrives in their account at the right time. At this stage in our digital progression, we cannot lose sight of the positive role people play in guiding SMEs towards achieving their goals.

At Bibby, we are proud to be in The Sunday Times’ Best Companies to Work For as we feel this is testament to the emphasis we place on the relationships we have with each other and our clients.

For now digital-only platforms are operating in one corner of the market. If they want to move beyond transactional services they will need to provide a greater service to SMEs, a service we believe can only be enhanced through relationships between real people.