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How the financial crisis has changed SME attitudes

It’s Entrepreneurship Week on Bdaily. Anil Stocker, Head of policy of The Next Generation Finance Consortium (NGFC) shares his views on how the financer crisis has changed entrepreneur and SME attitudes to finance.

Banks have become less and less trusted in the last five years. 12% of small firms are now funded through personal credit cards, because entrepreneurs either have been turned down by the banks, or assume that they will be.

SMEs at every stage have been hit by the difficulties of accessing finance. Small companies who supply large corporates have suffered a ‘double credit-crunch’ – stuck between the banks as they reduce their funding limits, and their customers who are extending their payment terms to 60 days and beyond. Entrepreneurs have been struggling to get loans from banks, and start-ups have battled to access equity funding outside of their friends and family.

However, a solution to the issue of squeezed funding for small businesses has emerged in alternative finance, which is making up the shortfall by delivering business funding seamlessly via the Internet. It’s cheaper than traditional providers because it connects borrowers directly with lenders, skipping out the bureaucracy of banks.

Entrepreneurs are typically one of the first groups to adopt any new technology, and this has been particularly true of the alternative finance movement. As the advantages of online platforms and non-bank finance become more generally known, more and more growing companies are turning away from traditional providers. Hundreds of millions of pounds were channelled to SMEs in 2012 by members of the Next Generation Finance Consortium – the figure for 2013 looks to be significantly larger.

Alternative finance provides all kinds of ways to access funds, control cash flow and better manage costs, whether in the form of long-term loans, equity investment or next-generation invoice finance. The benefits should appeal to growing firms particularly – flexibility, cost, and speed of funding – exactly the qualities small companies say they look for in their finance.

These new, innovative companies have simplified finance. The banks have reduced lending to small companies, which has forced them to look further afield. However, the inherent advantage of simpler funding would have pushed alternative finance into the mainstream.

For instance, one of our members provides invoice finance, a sector which had not seen innovation for fifty years. They regularly sell invoices from foreign debtors that the traditional providers will not offer finance against, because its investors have global appetite. Companies can use the service as and when they want, unlike under traditional factoring contracts which insist on discounting the whole order book.

What the crisis revealed was how little innovation there had been in the financial sector. It unleashed a flood of dynamic companies that is stripping away the bureaucracy of the banks, restoring trust and revolutionising the lending landscape. Small businesses have always wanted simple and affordable finance – the crisis only made that clearer.

Alternative funding providers like the members of the NGFC really are the next generation of finance. Being internet-only, we are lighter on our feet. Our costs are lower, both our operating costs and the cost of our funding, because we take the borrower directly to the lender. Since it’s difficult for investors to get returns elsewhere, they’re clamouring to finance small businesses. It’s a better deal for both parties.

This was posted in Bdaily's Members' News section by Anil Stocker .