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SME Profitability on the Rise

More good news on the SME front – where profitability appears to be on the rise.

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According to the latest grilling of the nation’s small businesses – the BDRC SME Finance Monitor – 77% of UK SMEs reported making a profit in Q3 2014. That number has risen from 69% in the same quarter last year. Tellingly, the number of SMEs owners using personal funds to finance their business has dropped off from 46% in Q3 2012 to 28% this year. That stat chimes nicely with a recent report which suggested that of the 40% of small businesses that will be seeking funding in 2015, 31% will be paying a visit to an alternative lender.

The rise of alternative finance forms have likely had a positive impact on the profitability of UK SMEs. Hyper-efficient and typically cost-effective, alternative funders can provide access to finance when it’s needed most. It’s not a stretch to suggest a strong correlation between the proliferation and growth of such platforms and the general health of nation’s SMEs.

The BDRC SME Finance Monitor suggests that awareness of “crowdfunding” is at its highest point since the survey began in 2011. Phil Orford, Chief Executive of the Forum of Private Business, weighed in:

“Despite the banks’ continued efforts to win back SME confidence, a large number of small businesses remain unconvinced. Many are increasingly considering options such as crowdfunding, trade credit, and dipping into their own reserves to fund future plans, which is likely to stifle the pace of growth in 2015.

“There is an urgent need for banks to re-establish trust with small businesses, particularly as we enter a period of political and economic uncertainty in the run up to the general election in May.”

While we agree that certain banks appear to be mobilizing for a return to SME lending, we’re not so sure about the stifled growth point. The UK’s alternative finance scene now has the capacity both in terms of variety and liquidity to handle the majority of small business activities.

Indeed, the major peer-to-peer lenders, for instance, typically have an excess of capital to deploy – their growth restrained only by a shortage of suitable borrowers. We recently showed traditional lender activity and alternative finance action in the SME space to be moving in opposite directions. That trend doesn’t need to be reversed for the country’s businesses to flourish. 

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