Reflections on the changing funding world

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Some onlookers thought that 2015 would be the year when we might be able to move on from the fallout of the financial crisis, with UK banks finally forgiven for their past misdemeanours. There were positive murmurs from the Government and a clear desire to get on with the vital work of restoring trust and confidence in the financial services sector.

Indeed, in his June Mansion House speech, Chancellor George Osborne spoke about the UK financial services industry’s capacity to be the best in the world, with “more competition, more innovation and more players in retail markets.”

The industry expected an end to the loathed bank levy as a result, but surprisingly Mr Osborne levied a new surcharge of 8%, applicable to all banks and building societies, including ‘challenger’ banks, which he previously appeared to embrace.

Defending this seeming U-turn, the Chancellor said “the banking sector has to put something back into the economy, so there will be no changes to the tax surcharge this fiscal year.”

It seemed that all was neither forgiven nor forgotten.

This ongoing stasis in relations with the banks is regrettable mostly because of the unintended consequences of legislation and regulation. The sad truth is that the weight of a tightened regulatory burden falls on the shoulders of UK businesses – the very organisations the Chancellor is hoping will power us on to continued economic growth.

With European and global regulation forcing banks to meet ever-higher capital and liquidity requirements, banks are increasingly unable to lend to businesses. This is even more severe in the case of SMEs and start-ups, who are considered high-risk. As the banks move to shrink their balance sheets, they are also largely exiting many forms of business lending.

It simply doesn’t make financial sense anymore for the banks to lend to businesses.

An even hand

As the head of a large independently owned financier, many may think that this is welcome news to me. But the reality is that – in a business’s funding tool-kit – there is a place for traditional forms of lending, in addition to non-bank forms of funding.

From overdrafts to invoice finance, leasing to bank loans, the market needs a full range of offerings to meet small businesses’ needs.

At present, however, the current media landscape portrays SMEs as having an ‘either or’ option. Either secure funding from a bank or peer-to-peer (P2P) lenders. But there are other avenues for businesses.

You would expect me to highlight invoice finance, but leasing and asset based lending are two other viable forms of business funding.

If SMEs rush to P2P lenders, in place of more established forms of funding, they are putting their faith in – as yet – unproven and untested players that only offer funding pure and simple, without value added services, such as sales ledger management, credit control or payment collection.

A recent Evening Standard article discussed rumours of a looming P2P lending failure and it is my belief that the Chancellor must be even-handed in highlighting risk within the financial system. This includes extending appropriate warnings about newer forms of finance to both SMEs searching for funding and investors looking for returns.

The Chancellor should also remember that the UK has a significant tradition of independent asset based financiers. At any one time such funders provide £19.3 billion in to businesses and this significant contribution to employment, growth and output must not be taken for granted.

A new opportunity

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Last week, I was appointed as Global Chief Executive for Bibby Financial Services.

I first joined BFS in April 2012 as UK CEO and since this time I have been consistently impressed with the determination, commitment and spirit of the people within this business.

In the announcement of my appointment, I commented that BFS was a progressive company with fantastic people and genuine commitment to delivering market leading service to our clients.

I meant all of this.

Having been in the financial services industry for 37 years, I have worked for and with a number of leading businesses, but BFS is undoubtedly the most client centric of them all.

Over recent years, we have grown significantly, but at all times we have remained true to our promise to deliver leading products that suit the needs of SMEs, coupled with personalised service, helping these businesses to survive and thrive.

While there is change and uncertainty on the horizon for many businesses across the world, including the economic downturn in China, US presidential campaign and the UK’s EU referendum debate, there are also an abundance of opportunities.  In order to take full advantage of these opportunities, SMEs need to ensure that they have funding partners that offer support, guidance and expertise.

I believe that BFS can offer this support to SMEs across the world.

While we may not yet have brand awareness of the big four UK banks, or the shiny new-fangled novelty appeal of newer funders, we do have the financial stability and backing of our parent group, the Bibby Line Group, and established funding, coupled with a stoic determination to deliver for our clients.

To ensure we continue to meet the changing needs of our clients, we are developing new products and investing heavily in improved digital access. This truly omni-channel approach will allow clients to transact with us how and when they wish.

What will continue to set us apart, however, is our local knowledge, ability to shape a facility and our brilliant team who care passionately about our clients.

Mind the skills gap

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SMEs recognise that the UK economy is suffering from a prolonged skills shortage. The CBI recently warned that this is a barrier to recovery, with 2 in 3 businesses saying they expect their need for staff with higher level skills to grow in the years ahead.

The skills gap is seen as one of the main reasons for the UK’s productivity woes, particularly affecting sectors like engineering and construction. The Institution of Engineering and Technology (IET) found that over half of companies said that a shortage of skills poses a future threat to their businesses, while the Federation of Master Builders said a similar proportion of construction SMEs are struggling to recruit bricklayers, carpenters, joiners and supervisors.

As these gloomy studies indicate, there is a clear need for a skilled workforce. However the question that we really need to address is: how do we convert an abundance of low skilled, inexpensive labour into a highly skilled, productive workforce? Hiring low-skilled staff in droves, while reducing investment in training, technology and equipment, clearly lowers our productivity levels. The UK is woefully behind all of its developed nation counterparts on this key metric. According to The Economist, “a British employee produces a fifth less than a French one, but he or she is more than a third cheaper to hire.” British employers are choosing to hire more people, who are less skilled and less productive than workforces in other European nations.

Thankfully, small business owners and decision-makers appear to be taking a different approach by focusing on training and upskilling existing staff and turning away slightly from hiring. Our Quarter 2 2015 SME Confidence Tracker showed a steady increase in the number of SME employers investing in their staff, quarter on quarter. This is a positive development, but even small business owners could do more. Around a third are not investing in anything at all, suggesting that they are more uncertain about the economic environment than general business confidence trackers indicate.

Small businesses have a clear role to play in arming future generations with the skills they need to succeed as individuals and to contribute to the wider economy.  Government has a role, albeit perhaps not as significant as one might imagine. Government  initiatives can focus too much on one solution. The Government’s appetite for apprenticeships has been well-intentioned and largely benefitted SMEs. There is talk of an apprenticeship levy for large companies, which could have unintended consequences for the little guys. If large companies shun apprentices due to cost, that could bring the whole Government-backed scheme down. I agree with the CBI that the apprenticeship levy should not be used to subsidise apprenticeships for small businesses.

Apprenticeships in and of themselves will not solve the skills gap – we should look to tailor strategy and tactics to specific industries and sizes of business, because what works for a large corporate may not work for a sole trader. In the absence of a specific policy answer to this problem, SME owners must do more to increase the appeal of working for them. Working for a small business clearly has unique benefits: employees have a bigger voice in the direction of the business, more exposure to a variety of different business areas and a direct line to the Founder and CEO.  Young people are struggling to find work, with the latest unemployment figures at 15.9% for 16-24 year olds. It’s time for UK small businesses to really sell the unique aspects of working for an SME to the youth of today, if we are to tackle today’s skills gap – and tomorrow’s.

Why P2P lending is not a silver bullet

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The myth of the P2P panacea

I am in favour of anything that increases choice and enables the UK’s SMEs to access the funding they need to grow. The peer-to-peer (P2P) lending market has grown substantially since the first provider, Zopa, arrived in the UK in 2005, with the market surpassing the £1 billion funds advanced mark by the end of last year. To be clear, this is the total of all loans and not the funds-out at any one time.

Unlike many traditional funders, however, new players on the financing spectrum have been welcomed by government and policymakers alike, without so much as a hint of caution. Politicians, particularly, have viewed this newly emerging sector as a panacea that will shake-up the market and solve the funding needs of small businesses forever.

Moreover, it has been branded by some as the ‘Uber of finance’, supposedly disrupting an uncompetitive or dysfunctional market that was ripe for innovation. This narrative, though appealing in its simplicity, is far from the truth.

The UK has long boasted a healthy and highly competitive alternative financing sector, which it should be proud of. But, all too often, policy-makers ignore an already mature sector; seeing competition in the market as a two-horse race between major high street banks and shiny-P2P lending platforms. They seem to love the new, just for its novelty.

But, it’s the alternative middle-ground that has proved itself time and time again. In fact, just this month the Asset Based Finance Association announced that £18.9 billion was lent to businesses in the first quarter of 2015 – a £1.2 billion increase year-on-year. Through bull and bear markets, independent funders and asset based lenders have demonstrated their longevity and local presence in the UK market. This strong track record is largely ignored as it is not new. It is, however significant and most importantly, it provides real support for businesses when they need it. It did so right through the last recession and helped prevent the downturn being even worse.

The limitations of youth

Despite the halo effect surrounding new market entrants, these platforms still account for only a tiny fraction of SME lending in the UK. Furthermore, funding amounts advanced to SMEs are limited and cannot yet satisfy the full range of business needs.

Notwithstanding its attractiveness to media and government alike, awareness of this lending option is generally low among business owners. Our quarterly SME Tracker found that just 1% of SMEs used P2P or crowdfunding in Q1 and half of the small businesses we surveyed for our SME Manifesto in May said that they would not use a P2P lender.

It’s evident that many do not share policymakers’ enthusiasm for these lenders and  owners and decision-makers explained that they either distrusted P2P lenders or felt they would not be able to get the financing that would be right for their business through this channel.

Apples and oranges

A fundamental problem with debating comparable merits of different funding types is ensuring comparison on a like-for-like basis. A P2P lender provides funding pure and simple – not credit control, sales ledger management or payment collection. Many can’t offer multi-lingual or multi-currency services, helping businesses to enter new markets or import goods from overseas.

Fundamentally, P2P lending is more about delivering an investor return than the provision of funding and services to small businesses.

Strong funder, strong future

Looking ahead, the UK faces a referendum over its membership of the EU and a tough monetary policy decision on when and how interest rates will change. As recent years have proven – we are never too far away from the possibility of a return to recession. It will be fascinating to see how the market fares through the whole economic cycle. The lack of a capital buffer may expose unwary investors to more risk than they bargained for.

I wish all lenders well and believe there is room in the market for us all. What we do need is more balance when it comes to evaluating options.

Earlier this month, our research found that 14 per cent of SMEs use loans from friends and family to fund their business with a quarter (23 per cent) using a bank overdraft. As this period of political and economic uncertainty continues, SMEs must future proof themselves from financial shocks by ensuring that they have sustainable and flexible sources of funding, tailored to their needs. This could be a combination of financing types, including overdrafts, leasing, loans, invoice finance or even P2P.

However, we must recognise that financing in 2015 should have a wider purpose beyond simply offering a lump-sum. Funders have a larger role to play in society – managing relationships with customers and suppliers and helping small businesses position themselves for growth.

It is here that a finance provider can become an extension of an SME’s own team; a role that many independent funders are proud to play.

Next Government must recognise the full range of financing options for UK SMEs

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The lead-up to the General Election on 7 May has had an unprecedented focus on small businesses, with all parties outlining policies designed to support their growth. The parties appear determined to help ‘working Britain,’ particularly the small business owner. But the political parties’ manifestos indicate a worrying ignorance of how SMEs seek financing. They imply that UK SMEs are faced with a simple dichotomy: the big banks on the one hand and emerging peer-to-peer lenders on the other. The reality is very different. UK SMEs have a number of financing options available to them, including thriving independent funders. Bibby Financial Services is one such funder, acting as the lifeline for small businesses during the recession and ensuring their survival. Now Bibby is helping these crucial businesses return to growth.

The political parties seem to believe that more quangos will solve all of SMEs’ problems. But will a Small Business Administration, a Small Business Conciliation Service and a British Investment Bank foster growth in the crucial SME sector? The next Government should focus on making all the options available to SMEs self-evident to business owners and decision-makers, rather than creating more public bodies. Equally the manifestos favour forcing more responsibilities and broader remits onto the British Business Bank. But surely narrowing its remit to the provision of financing for those SMEs that need it most is the most effective route forward.

The main parties have heaped praise on peer-to-peer lenders, with some planning to increase support for crowdfunding and alternative lenders by aligning them with Local Authorities. However, we must not lose sight of the fact that peer-to-peer lenders are risky and untested. The new kids on the block will not herald the salvation of UK SMEs. Nor do they represent a panacea to the market as a whole.

From our customer feedback, many small businesses are nervous about using these platforms and do not trust them. They prefer more personal and local service which can respond to their specific needs. That is why Bibby is expanding our locations and employee numbers to be nearer to our customers.

The next Government must open its eyes to the size and scale of the financing market serving SMEs. Simply ignoring independent funders who sit between banks and peer-to-peer lenders is not an option. We must prioritise educating UK SMEs about all the financing options available to them. Only then will we improve the UK’s productivity and innovation, areas where we are sadly underperforming against our global counterparts.

Thanks for reading

David Postings

UK CEO, Bibby Financial Services

About David Postings

David Postings is the UK Chief Executive Officer for Bibby Financial Services following his appointment in April 2012. David is an experienced senior executive with over 35 years’ experience in financial services. David has extensive knowledge of the commercial finance landscape.

You can read more about David Postings and his position at Bibby Financial Services in the About Me Section.