Elephants in the funding room

In a recent blog carried on smallbusiness.co.uk and titled Why collaboration between banks and alternative lenders is good for small businesses I developed a long-standing theme about the need for collaboration between all funders in the SME finance space.

This collaboration is vital if we are to better serve our customers, and thus the nation, by accepting that each of us has a different perspective, a different risk tolerance and a different set of goals.

However, there is little doubt that underlying this call for co-operation is an acceptance that there are potentially two elephants in the oft-quoted room to be dealt with.

The first, and most obvious elephant, is that our banks – specifically the dominant high street lenders – currently have little incentive to change. Competition in the SME finance field is extraordinarily low.

The big lenders seem to regard their small business loan books as an annoyance rather than as an asset. Trying to get them to focus on this constituency and come up with innovative financing arrangements such as the lending “clearing house” that I refer to in the blog is going to be tough.

On the ground it is clear that individual branch managers and those corporate relationship managers that are left standing, think that this type of co-operation is vital and given a nudge from upstairs would certainly like to boast that they are involving others in the due-diligence process, even if this means less of a monopolistic attitude to the individual customers.

The second elephant is somewhat more problematic.

Business owners themselves need to re-think the way that they approach their company finance. For decades the habit has formed to have all the funding eggs in one (mostly bank-owned) basket.

I can tell you from first-hand experience that this attitude is hardwired into our psyche. The desire to have all funding in one place is strong and understandable. The sense that this consolidation means the banker will know all about this business and thus be flexible in their approach, is pervasive and dangerously simplistic.

This is not a criticism, simply an observation borne out by our experiences of the last five years.

Lenders must make the potential complexity of multi-channel funding palatable to business owners. Simplified statements, co-operative lending panels, new methods of communication must all be built into our processes if we are to truly open up this marketplace.

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