Member Article

Why SMEs can't bank on traditional finance

Attributed to Amit Sankey, CEO, Wirefund

Small business is the wind within the sails of the British economy. From hairdressers to haberdashers, each bagel, bob cut and bouquet fuels the flames and keeps the UK afloat.

But, we have now entered choppy waters. Britain’s decision to exit the EU and the resulting Government reshuffle has cast a shadow of doubt across the UK’s small business community. The fall in Sterling, while attractive to global exporters based in Britain, is piling on the pressure and uncertainty is the order of the day.

Consumer confidence is down. Investment is dwindling. And the new Government’s approach to small business is still unclear. While Theresa May has described SMEs as the backbone of Britain, accounting for approximately 99% of all UK businesses, they now find themselves heading into a storm and without the paddle of traditional finance to support them.

However, there is a light at the end of the tunnel. Volatility often creates opportunity and small businesses that react quickly can reap the rewards. The knee-jerk reaction to Brexit for many SMEs is to wait out the confusion and let the dust settle. However, those that invest in growth now could become the rose that grew from concrete, especially as others around them fail to seize the initiative. But where will that investment come from? Not the traditional lenders.

Mind the traditional finance gap

The finance industry notoriously avoids instability like the plague; whether it’s political insecurity, unexpected economic turmoil or a combination of the two, banks will, and for good reason, run for the hills. Good news for financial security, bad news for small businesses in need of cash.

Uncertainty is currently rife, and as expected, financing has become scarce. Take the recent news of Virgin Money delaying its plans to enter the small business lending space as a direct example. The majority of SMEs in the UK receive finance from retail banks. And, as Brexit continues to make waves, these banks are extremely hesitant to provide that financing. In times of prosperity an SME could look to a bank loan if a coffee machine broke down, an oven died or a treadmill ground to a halt, but this is no longer the case as once-secured overdrafts and credit lines could be pulled by banks at any moment.

Instead however, SMEs can look to alternative lenders to bridge the finance gap. As banks flee the market, online lenders are utilising technology to offer loans delivered at a quicker rate and without the headaches associated with traditional methods.

Smooth the crack in consumer confidence

And with cracks in consumer confidence making headlines on a daily basis, these alternative forms of finance are needed more than ever.

Saving soon exceeds spending when perceived dangers from events like Brexit are looming. Customers begin skipping their morning coffee, cutting their gym membership and passing on the blow dry – all in an effort to save the pounds.

While retail sales were on the up following Brexit, the long-term implications are still unknown and consumers typically shy away from big purchases in uncertain times. The impact of consumer spending may not be felt until businesses begin to scale back operations or cut jobs – leading to a shortage of cash in the small business coffers.

Finance can settle the turbulence of this period of decreased consumer spending. As overdrafts dwindle, alternative methods of finance provide access to loans which can hedge against reduced profits – and help prepare for the inevitable shopper boom.

Avoid the small business grim reaper

Without available finance in periods volatility, businesses could face a cash flow failure. A silent killer, it is arguably the biggest fear for small to medium enterprises, whose survival balances on their ability to manage cash.

It is estimated that 80-90% of small businesses fail because of bad cash flow and the economic climate of today is the perfect condition for cash flow failure. A lack of funding and less spending means that a company’s outgoings often soon exceed their takings. And if this continues for too long, the business is bound to capsize.

But, from the ashes of traditional finance, alternative lenders have grown and mean small businesses need not fall victim to cash flow failure. Technology-empowered finance can enable small businesses to succeed.

Financing is no longer restricted to the retail bank on the corner of the high street. Lending has evolved and small businesses can now be confident to push on from troubled waters to new and exciting horizons.

This was posted in Bdaily's Members' News section by Louise Veitch .