What exactly is ‘alternative finance’ – how does it differ from traditional lending? Who are ‘alternative lenders’ and are they a threat to traditional banking models?
Alternative finance is a bit of a catch all term. It started off a few years ago meaning peer-to-peer (P2P) and crowd funding, but now seems to have expanded to include asset finance, invoice discounting, and other types of lending. Essentially, it is now used to represent all that is not thought of as a ‘core banking’ product, though this is a little misleading as most high street banks, like Barclays, offer both asset finance and invoice discounting.
Crowd funding and P2P offer some unique benefits. For example, they are a great way for people raising finance to test the viability of their product – if people are willing to fund it, they’re probably willing to buy it. Additionally, funds can be accessed fairly quickly, and in some cases, alternative lenders have a different credit appetite to banks, so may be able to lend where banks can’t.
So, are they competition?
Yes, but in a good way. FinTech keeps us on our toes and leads to a continual drive to improve speed of access to finance and the customer experience. Barclays is ahead of its traditional bank competitors having launched ‘Business Pre-Assessed Limits’ - a service where customers’ ability to borrow is assessed and a lending limit is presented to the customer online, on the phone or in branch. In addition to this, customers can apply online via our ‘Business Instant Lending’ platform, following a streamlined, simple process – with access to funds in just three hours. Nearly 300,000 customers have access to this service, which we’re expanding every day.
What’s more, it’s not all about bank lending (I know it may surprise you to hear me say that!). What I mean by this is that the UK needs a healthy funding ecosystem. Bank lending is one way of accessing finance and getting the right funding, but isn’t the only answer. During early stages, cash from customers’ friends and family and their own savings is often the right way to go, and for those seeking their first round of funding, equity brings cash and potentially expertise into the business. There are a huge number of local grants available too, as well as Government schemes such as Start-Up Loans, which are sadly underused by SMEs. And sometimes, finance isn’t the answer. It might simply be mentoring and advice to get your business plan to the right stage before seeking funding.
There are two basic types of funding available to small businesses - debt financing and equity financing. Do banks have a role to play in
a) equity finance and
b) educating small businesses as to the options available to/which is best for them?
In short, no and yes! When it comes to SMEs, banks are about lending, not equity. Equity is a very different proposition, and one which SMEs need to go into with their eyes open. It has the benefit of direct involvement often by the funder, which can lead to great advice and support, but some can feel that this takes away their independence. From a bank perspective, holding equity involves a very different risk profile, and banks are not set up to become directly involved in a business like a Business Angel or another equity partner can be.
That said, it’s critical we can signpost customers to whatever form of finance or support they need – typically this is either mentoring or business advice to build a solid business plan, or cash to build the business. It can be overwhelming as a small business to understand what’s out there, and Barclays has a key role to play to help businesses understand what is available.
This is not to say that we would not look to see where there are areas in which we can do more. For certain high growth businesses, great businesses that may be suitable for lending have been unable to access debt finance because their large levels of upfront investment lead to losses, despite a strong underlying business. Whilst this market is still primarily funded by equity, Barclays has a unique proposition which helps these businesses access debt through innovation finance, which enables us to lend with partial backing by the European Investment Fund.
What are your thoughts on the future of small business finance in the UK?
SMEs account for 30% of UK GDP and about 40% of employment. A strong small business market is critical to the success of ‘UK PLC’ and access to finance is a key part of this. There are a number of Barclays and industry level changes heading our way, which will improve customer experience. At Barclays, we must maintain our relentless focus on improving our processes for customers; increasing the pound amount available under pre-assessed limits, broadening our Instant Lending platform to speed up fulfilment in branch and to ‘go mobile’ with releases in BMB. We won’t stop there and have plans to do what we’ve done for unsecured lending in terms of speed, transparency, access, and information for our secured lending too, completely transforming our entire lending journey. The Government is also playing a part, introducing policies to offer referrals to alternative lenders if a customer is declined bank lending, and to open up data from credit reference agencies which will also lead to positive developments for business finance in the UK.
However, as I’ve said above, it’s not all about finance. SMEs need advice and guidance on all manner of issues – from tax, to accounting, to supply chain management, to export, to evolving marketing and routes to market. One thing we can do is to help our frontline colleagues be as best informed as possible to help SMEs navigate the challenges they will face in future.