New findings reveal that £20bn could be lost through a lack of SME awareness around alternative finance.
The alternative finance industry is growing at a rapid rate, but vast numbers of business owners remain unaware about the alternative options that are available to them when looking to raise funding. The Case for Raising SME Awareness of Alternative Finance report asserts that four UK banks provide 80% of SME lending, and that 56% of survey respondents remain oblivious to all forms of alternative finance – including peer-to-peer business lending and equity crowdfunding.
Dr. Louise Beaumont, Head of Public Affairs at GLI Finance, co-authored the report with Tania Zeigler, Researcher at Cambridge University Centre for Alternative Finance, and they suggested that the Government must reduce concentration risk in the credit ecosystem through a well-resourced awareness raising campaign.
Commenting on the report, Dr. Louise Beaumont said:
“Lack of awareness amongst SMEs of the financing options available to them – despite a plethora of well-intentioned documents, reports and guides for SMEs - is an issue that threatens to undermine the UK’s economic recovery.
“We must think less about individual policies and mechanisms in isolation and much more about the bigger picture. We need to do the simple things much more effectively to enable SME behaviour change, and to create an environment where the Small Business Enterprise and Employment Act can flourish to the benefit of SMEs and to drive growth in the broader economy.”
With SMEs accounting for 65% of net job creation, the report argues that failing to increase awareness of alternative sources of credit to help fuel growth could cost the economy up to £20bn by 2020, as traditional lenders continue to withdraw crucial funding lines.
The Cambridge University for Alternative Finance also conducted a survey looking into businesses that had previously raised capital through alternative finance and uncovered three major outcomes for companies that had used peer-to-peer lenders:
Similarly, when it came to invoice trading, 60% of businesses reported an increase in employment, 90% reported an increase in net profit/net income, and 80% said that turnover increased.
Dr. Beaumont added:
“The body of evidence that supports the crucial role the alternative finance sector has played in driving SME growth is unquestionable, helping SMEs increase both turnover and profit, whilst hiring more staff. The industry has started to fill a vital credit gap as traditional lenders have retrenched from the market in the wake of the financial crisis.
The report also reveals that 90% of SMEs go to their main bank for overdrafts, general purpose business loans and credit cards, but recent figures released by Funding Options estimate that since 2011 banks have withdrawn £5.7m a day in small business overdrafts alone.
To address these issues, and ahead of the Autumn Statement, the report calls for the Government to support the implementation of the Small Business Enterprise and Employment Act’s mandatory referral scheme, with a national awareness raising campaign utilising the principles of behavioural insight (aka ‘Nudge’) in order to change SME behaviour, drive structural change to the financial system, and facilitate economic growth.
Dr. Beaumont commented on the growth of the sector:
“The alternative finance industry has achieved a great deal in a short space of time but it is imperative the Government now leads the charge, supported by industry groups and industry itself, in order to ensure SMEs get the help they need to grow and that the alternative finance industry cements its position as a mainstream and complementary part of the financial services sector – not least to give the Northern Powerhouse a fighting chance, given that SMEs in the North are having their overdrafts slashed at twice the rate of SMEs in London.”
The report has received backing from Innovate Finance CEO Lawrence Wintermeyer, who said:
“The Competition and Markets Authority’s interim findings confirm that SME finance remains highly concentrated, with awareness of alternative finance options among SMEs low, despite a raft of business finance guides in the market.
“More must be done to encourage SMEs to explore all of the finance options available to them, to diversify the sources and access to SME finance, and to change SME behaviours when it comes to material consideration of alternative sources of finance. The data in the Cambridge Centre for Alternative Finance report highlights the positive impact this could have on jobs and investments in SMEs.
“A new approach rooted in behavioural economics should be explored to help ‘nudge’ SME behaviour and diversify the SME finance landscape to help drive economic growth.”
Join AltFi for its third annual Alternative Income Forum, exploring closed-ended funds (investment trusts) specialising in generating an income using alternative assets such as specialist finance, P2P lending, direct lending, asset leasing and more. Hear from the leading investors and fund managers in this rapidly growing market.