From little acorns

The last few months have been an extraordinary time for the world of alternative business funding in the UK.

Until recently considered a backwater of mainstream finance, without heft and much misunderstood, alternative funders are now beginning to reap the reward of years of swimming against the tide.

We live in a world where momentum is everything. I recently attended an event discussing the prospects for the alternative funding sector with Dr Vince Cable, and it was during this conversation that I realised that momentum appears to be on our side.

That is not to say that everything is plain sailing from here on in. Far from it. We have experienced false dawns before. But something is different this time.

The time is right.

We have come to an important tipping point. The status quo is no longer acceptable and there is an alternative. Business owners require choices and once they realise what choices are available they will demand access to them.

I have blogged before that what we were building was nothing short of disruptive to the world of business finance. Do not doubt that what we propose will provide this disruption. When people have choices they exercise those choices.

But this shouldn’t be seen as a negative, even by the very biggest lenders in the marketplace. Their strengths will continue to serve them well. With their sophisticated risk modeling, highly trained staff and sometimes many hundreds of years of experience and credibility, they remain and will remain the dominant force in business finance for the foreseeable future.

And yet they have weaknesses. So often they are forced to reject loan applications; unable to share the risk, they find themselves with no secondary or tertiary position. Yes or no. The disappointed borrower and unfulfilled lender.

As the alternative business funding marketplace develops and matures, able to assess risk differently, able to utilise assets that banks aren’t able to, lenders of all types will come to understand that transparent collaboration in this field is the real disruption.

Talking is over – time for action

April 25, 2014 is an important watershed for UK businesses looking for finance. The date marks the end of a consultation process initiated by the government earlier this year. This consultation seeks views on whether the government should legislate to help match SMEs that have been rejected for loans, with alternative finance providers who are looking to offer finance.

Importantly, the consultation also asks questions about the mechanics of delivering such a measure should the government decide to legislate, and sets out the government’s preferred approach of requiring banks to refer details of SMEs that have been rejected for loans to a platform or platforms, so that they can be accessed by providers of alternative finance.

As I am sure you are aware, we have been championing such change for the last few years, and without indulging in knee-jerk bank bashing, we have been trying to turn the conversation with the big high street lenders in this more practical direction, by encouraging them to refer clients they can’t, or won’t, assist in the course of their normal operations.

While we have certainly achieved some success in this area, there is no doubt that a shove from the government will make a huge difference. With initiatives such as the website, I am pleased to say that we have been at the forefront of a movement to bring non-bank financing options into the mainstream in the UK business community.

With this consultation now drawing to a close, it is platforms such as this that will allow business owners to get easy access to real choice in their financing that they have for so long been denied.

Bold challenge

Legal & General, the UK’s biggest pension fund manager, has unveiled plans to begin lending to medium-sized UK companies, in one of the boldest challenges to bank financing yet.

Nigel Wilson, L&G chief executive, made a series of significant comments recently around the current state of the UK banking system and how the £440bn asset insurance giant is developing a series of ideas on how to better use this jumbo-sized cash pool to (and these are his words) “provide socially useful products.”

Now, I don’t know about you, but my natural inclination is to be wary of massive, juggernaut operations talking street-level economics. Let’s face it the realities of running a £440bn enterprise are challenging I’m sure, but they are also pretty irrelevant to the millions of smaller enterprises throughout the UK.

However, I was really taken aback when Nigel Wilson said the following.

[blockquote]“We will step up and take over the roles that the banks have fulfilled over the last 20 years.
The banking model… based on excessive leverage… is inherently unstable.”[/blockquote]

He continued stating that one of the most pressing problems was the extremely short timescales that the vast majority of bank lending is based upon. L&G will be looking to provide financing vehicles with seven – 50 years windows, potentially creating a whole new model for UK businesses looking to raise debt.

So, using pension funds to help finance UK business. Hmmm, who would have thought!

Of course, a giant like L&G is really looking at large or larger medium-sized companies. But the principle is the same. Pension funds being actively invested in UK business for the good of the individual and the good of the business.

There is a significant market that will not be served by the likes of L&G. The millions of small and medium-sized businesses that are equally deserving of support and it is here that pension-led funding becomes relevant and indeed, critical.

Lessons from Europe

I would like to refer you to an excellent article on the Financial Director website. Titled “A gateway to better lending – learning from the German model“, the article coherently describes the considerable and structural differences between the UK’s “Big Global Bank” model and the German focus on regional and even local banks to support their small and medium-sized business sector.

It is not a surprise to any of our customers that more than 25% of business overdraft requests are turned down and similarly 34% of business loan applications in the UK end unsuccessfully.

One commentator in the article says: “I think we can take it for a fact that SMEs face huge difficulties”, an understatement indeed. When you factor in recent figures showing that loans to small businesses fell again in December by £1.2bn to a 12 month low, it really does feel like we are going backwards.

So, initiatives such as the one I have personally been championing – an exchange that can signpost appropriate alternative funding options – seem to me not just to be relevant, but critically important.

As the brave folks on the central square in Kiev have found to their wonder and joy, sometimes when the system can’t provide what the people need, you just have to get out there and change the system itself! Now I am not naïve or arrogant enough to claim association or partnership with the ‘heroes’ of Kiev, but I will suggest that a month or two ago hardly any of them could have guessed that the power of their collective action would have generated such extraordinary change.

A humbling lesson for those of us involved in the growth of alternative business funding.

I hope sincerely that we can, in our own modest way, effect some real change in this area for small and medium-sized businesses.

No longer ‘invisible’

One of the consequences of the financial meltdown over the last seven years has been the gradual awakening of the establishment to the power and importance of our small business community.

That is not to say that small business has been completely invisible for the last half century, but I have found that the vast majority of those making policy with regard to SMEs have been paying lip-service to a perceived voting bloc rather than dealing with fundamental issues of support, financing, risk and education.

Of course small businesses are good. Of course they are engines of growth, of course they employ millions. But in the end small businesses, in general, have been going it alone. Where there has been support for owners it has generally been from friends and families or sometimes begrudging lenders, who talk a good game but simply don’t know how to deal with small businesses individually. Owners often complain about all being “tarred with the same brush”.

This week I am speaking at an event organised by the Goldman Sachs 10,000 Small Business Programme. This innovative programme, launched in 2010, brings together small business owners and over a one-day-a-week for 12 weeks introduces participants to experts from all areas of business who will help provide vital support to overcome the daily challenges faced by UK business owners.

The programme boasts the might of one of the great global finance giants and the fact that it has initiated this programme speaks volumes about the serious approach that is now being taken toward this often overlooked sector.

It is practical and forward-looking and I am extremely pleased to be involved in this enterprise, as it mimics much of the work that we do at Clifton Asset Management.

Rather than simply dispensing information, both Goldman Sachs and Clifton recognise that we need to help businesses create a successful pathway, one that enables them to access capital, grow and create profits.

Okay, 12 one-day sessions may not solve all the immediate problems faced in business, but it is a fantastic launch pad. As one of the owners interviewed in the excellent Goldman Sachs 10,000 Small Business Programme video remarked, “the end of the course was really just the start.”

Exciting and dynamic. More please.