Let’s start with what won’t happen in business lending.
Politicians and pressure groups love to opine that we need a return to branch-based local ‘Bank Managers’, who knew each customer personally and made lending decisions on a firm handshake. However attractive this nostalgia, most small firms are not willing to pay for a personal touch from their bank, and – even if they were – relationships aren’t necessarily the best basis for bank lending.
The exception is fast-growing firms, whose potential value as customers mean that they can still attract traditional relationship-based banking. Notably, a bank called Handelsbanken, originally from Scandinavia, offers a personalised local service, but they choose their business clients very carefully.
The web will make lending faster and simpler
It’s often the fastest-growing firms that need finance quickly, for example a successful manufacturer requiring emergency machinery repairs, or a web development company that has landed a large new client. Unfortunately, unless you’re lucky with your bank relationship manager, the UK’s complacent traditional lenders can be disastrously slow and bureaucratic if you need money quickly.
The good news is that online solutions are filling the void, enabling far quicker and easier lending. My own company allows firms using the latest online accounting software (such as Xero) to easily apply for funding based on their trading performance. In the same way, ecommerce firms can quickly access credit by providing online access to their eBay profiles. Even traditional high street retailers can now rapidly get finance based on their on their credit and debit card receipts.
These trends will continue: policy-makers plan a useful nudge to modern technology by giving small businesses more control over their bank account data.
Dozens of new niche lenders
The UK has an exceptionally concentrated banking market, with the vast majority of firms using just four major lenders. Although not without its benefits (our major lenders have good funding costs and strong branch networks), it also mean that UK firms get a ‘one-size-fits-all’ approach from banks.
Ridiculous as it may seem, most banks will treat a freelance web designer little differently than a hotel with ten staff, of a construction firm with three trucks. This simplistic approach to business banking offerings can undoubtedly create satisfied customers, but it rarely creates delighted ones. Worse, a lack of sector expertise in banks can limit lending, starving growing firms of vital capital.
The good news is that we’re already seeing a plethora of new sector-focused lenders, often targeting high-growth area such as ecommerce or international trade. The government is planning to help here too, by forcing banks to refer their rejected loan applicants to alternative funders.
The crowd will find its sweetspots
With banks showing renewed appetite for SME lending, things may get tougher for the ‘peer-to-peer’ sector, but there are obvious areas where this new form of finance can still dominate.
As banks have increasingly taken a ‘computer says no’ approach to lending, the power of the crowd to ‘pick winners’ can rise to the fore: Surely the best judge of a high street shop is its regular customers, so why shouldn’t they lend to it? Who’d argue that the first adopters of an exciting new product are best placed to decide whether it deserves investment?
Despite a lot of understandable negativity around business finance, constant evolution in the market means that things should get a lot better. We might even see some fresh ideas from the banks!
Conrad Ford is the founder of Funding Options, an award-winning ‘one-stop-shop’ for alternative finance that has featured in newspapers such as the Times, Mail and Guardian.