Alternative finance grows up?

One of the most perplexing elements of the SME funding drought of the last five years has been the inability of anyone to put their finger on the “real problem”.

Is it simply that the larger banks are unwilling to lend to small business? Or maybe that the pool of creditworthy businesses to lend to is shrinking? Is it a lack of confidence and thus demand for credit? Or maybe the whole process is so tortuous and time-consuming that many business owners just give up their quest in disgust and frustration? The answer is – it is a bit of all of these and maybe more.

What we do know is there is still a significant and diverse pool of businesses which are in the market for some form of finance for a multitude of reasons, and that these businesses simply won’t fit the criteria of their existing lender/s and thus the cycle of frustration begins.

And so the world of alternative finance has come alive. New models, new approaches, new outcomes and new issues.

The much whispered speculation that one of the highest profiled of these new models, the peer-to-peer lender Funding Circle, will do a deal with Santander to receive leads from the behemoth where the bank can’t or won’t provide financing to the business in question, is an excellent example of this new approach.

In fact, this type of collaboration (much promoted by Clifton through our brand) opens up tremendous possibilities to UK business owners.

Samir Desai, one of the three founders of Funding Circle and a Boston Consulting Group alum, makes it clear that he regards this kind of collaboration as evidence of a maturing marketplace, where all stakeholders accept that sharing information and risk benefits our own businesses, and, most importantly, the millions of UK SMEs currently under stress.

Going forward it is these businesses that are the real engine of growth in the UK economy.

Elephants in the funding room

In a recent blog carried on 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.

Alternative funding going mainstream

There is currently quite a lot of noise about alternative funding in the UK, specifically in the SME sector. In fact I’ll happily hold up my hand and say that we at Clifton Asset Management plc have been among the loudest of the drum-bangers in this regard, with our pension-led funding solution.

There is still a lot of work that needs to be done for the banks in this country to repair themselves, with some estimates talking of at least another decade.

This will require fixing balance sheets, complying with new capital requirements and other international restrictions, all carried out in a generally hostile environment and hitting some of the banks’ most profitable activities – speculative investing and trading.

And so this leaves a large and perplexing gap in the marketplace, one which many industries (witness this recent article in Construction News) are now acknowledging and grappling with.

But, with so many different ways of skinning this particular funding-hungry cat, how on earth can the harried business owner work his way through this field?

I have referred to one of my solutions in the past, effectively a clearing house to find appropriate funding options for business owners who have failed to convince their bank manager of their case.

I am pleased to say that as a result of my recent trip to Number 10, this has been received positively by the powers-that-be and I look forward to letting you know more about this as the weeks go by.

It is my belief that we will soon be able to do away with the label of alternative funding, as the variety of options available to business owners becomes clearer and those options are considered equally alongside those offered by the more traditional high street lenders.