The Treasury Select Committee Report on SME lending has revealed some tough truths about the continued dominance of the traditional players.
The report, entitled “Conduct and competition in SME lending", revealed that high-growth businesses with low levels of fixed assets are being starved of credit – citing this as a contributing factor to the UK’s poor productivity performance in recent years. The SME Finance Monitor recently discovered that 56% of first-time loan applications were approved in 2013, compared to a 94% success rate amongst loan renewals.
Nicola Horlick, CEO of Money&Co., commented:
“The overall picture is that fast-growing companies that have a low level of fixed assets are still finding it difficult to borrow money. It is vital to the future success of the economy that these companies do have access to debt finance. This is generally referred to as cash-flow lending and this is an area where peer-to-peer business lenders like Money&Co. are making an impact.”
But in terms of the scale of that impact, the report asserted that while the alternative finance and challenger bank sectors have scope to increase competition in the SME finance space – the banks continue to rule the roost for the time being. According to the report, gross volumes for UK peer-to-peer lending to businesses in H1 2014 amounted to £300m – around 1% of the £24.8bn that was lent to SMEs by the banks over the same stretch of time. The report in fact went so far as to say that:
“There is currently little evidence to suggest that new entrants in the SME finance market and existing measures to improve competition will deliver the transformation in competition that the industry needs.”
We’d caveat that statement by reminding readers that peer-to-peer SME lending over the course of H2 2014 amounted to £408m – £108m more than was facilitated in the first half of the year. Since the start of this year the sector has channeled £211m into UK SMEs, according to AltFi Data. With such rapid growth, competition may be closer to hand than the report suggests.
Price comparison tools – capable of elucidating the complex web of products in the “SME banking” market – were identified by the report as being in short supply. The aforementioned lack of competition was cited as a possible explanation of this dearth in transparency.
There might be a lack of price comparison facilities in the SME banking space, but there are an increasing number of methods of navigating and weighing up the various alternative funding options. To name but a few, The Funding Centre, Alternative Business Funding, Nurture Money, Informed Funding, Funding Options and Finpoint. The final mention is particularly interesting – as Finpoint aggregates both banking and alternative methods of raising capital. These portals have their own role to play in accentuating the impact of the alternative finance sector by driving business owners towards the huge variety of platforms.
Our key takeaway from the report? The rapidly growing alternative finance sector still has a huge amount of room for growth.
Anil Stocker, CEO of MarketInvoice – who, as part of the government's inquiry into SME lending, spoke alongside Funding Circle's Samir Desai to the Treasury Select Committee back in July, commented on the resultant report:
"Business banking has been broken for a long time, this report shows what many of us already knew - there is too little competition and small businesses have a captive relationship with their banks. There are problems in nearly every nook and cranny of business banking, from overdrafts to invoice factoring.
"Regulation is not the only answer and the Government has to be cautious that more regulation doesn't entrench the existing problems by making it impossible for new entrants to compete.
"Technology is driving more competition in the business finance market. Alternative finance providers lent more than £1bn to UK small businesses last year, more than treble the 2013 volume. The internet has a huge role to play in improving the business finance market, the power of online user reviews, price comparison and transparent fees has the potential to transform the market in favour of small businesses."
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.