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Can alternative lenders fill the gap left by high street banks?

Next week Shawbrook Bank is sponsoring the NACFB’s Commercial Finance Expo, where I’ve been asked to join a panel debate to get to the bottom of a question that the industry has been asking for some time – can alternative lenders ever fill the gap left by the high street banks?

We are, of course, all too familiar with the issue. Mainstream banks have reduced their lending to SMEs by an estimated 40%*, and when they do lend their offers frequently come with stringent conditions and often linked to other banking services.

Just last week the Federation of Small Businesses announced that four in 10 small firms requesting credit from the big five were refused in Q2 of this year. 

Looking to fill this vacuum is a number of exciting new entrants breathing life into the commercial lending market.

Shawbrook Bank is one but there are many others, too – from specialist banks and building societies to independent lenders and peer-to-peer networks, alternative funding routes are increasing by the month.

These new options are helping to ensure that diverse funding packages are available to SMEs, from initial or development capital  to asset-based finance covering property or machinery. There’s an element of ‘something for everyone’, in contrast to the highly regulated conditions imposed by the big banks.

So are alternative lenders like Shawbrook the answer? We’re a specialist bank that wants to lend to SMEs. We are agile, pragmatic and make lending decisions based on common sense. We are not bound by legacy issues so we can be dynamic. We make decisions quickly and support SMEs helping to support the vision they have for their growing their business.

But for us, it’s not as simple as plugging the high street credit hole with alternative lenders. We believe there’s a wider issue which needs to be resolved – business confidence.

In the last couple of years we’ve seen various government schemes to encourage high street banks to lend more to SMEs. Last year we witnessed the development of Project Merlin.

Just last week the government announced its funding for lending scheme, enabling banks to borrow government money at a preferential rate providing they pass it on to individuals and businesses in the form of mortgages and loans.

Any scheme that encourages lending to SMEs should of course be welcomed. However, we have yet to see any real evidence that these schemes are helping significant numbers of businesses to borrow. Banks claim that there is little demand for credit from SMEs, while the evidence suggests small businesses are still being refused credit on a regular basis.

In reality, the issue is both supply and demand. Risk-averse banks are refusing credit to SMEs. Meanwhile SMEs, fearful of rejection, are shying away from applying for loans even when it’s the right time for them to expand and grow.

From this situation a stalemate has emerged. The big banks can’t lend, and SMEs seem reluctant to borrow. So where do we go from here?

Since launching last October we have seen huge demand for lending but we believe there is an issue of confidence amongst business and this manifests itself in greater caution and nervousness around investment and alternative sources of funding. 

At the same time, we believe SMEs often look in the ‘wrong’ places when they want to borrow, often seeking funding from their relationship bank rather than alternative lenders. Meanwhile, government schemes favour the big five banks rather than new, specialist lenders.

Communicating the credibility of alternative funding sources is essential and it’s only through increased awareness of what’s on offer and positive experiences rather than knock backs that SME confidence will grow. 

Alternative lending sources offer choice, opportunity and optimism to small businesses. Now we need to give SMEs the confidence and awareness to take advantage of them.

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  • Michael White MD Boutique Capital 25th June 2012 at 2:04 pm

    In the present market we have what I would describe as ‘spontaneous’ regulation (some might say knee-jerk) to ostensibly protect a comparatively small number of potential rogues from themselves while the vast majority can suffer along with them. Similarly, the lending market is now crying out for products which will allow those who, perhaps through no fault of their own, missed a payment or got themselves into arrears in what has been the worst recession in living memory. These people may already be getting back on their feet due to their entrepreneurial instincts, but now have a less than spotless credit record – what chance do they have on securing loan/mortgage finance to help fund a new business?

    This moves us to the issue of alternative lending as a consequence of a very real dilemma where mainstream lenders have become almost completely risk adverse; instead everyone must opt for vanilla because this is the only flavour allowed. Positive sentiment needs to be encouraged but unfortunately with the ‘computer saying no’ is it really a surprise we limped into a double-dip recession? Those who want to innovate and create and help grow the economy will not have the chance because the risk involved in helping them has been deemed too great……Unfortunately, the availability of funds from new alternative lenders is not sufficient or too restrictive or in most cases both for any real volume lending. Accordingly, unless the new government initiative works, which I do not feel will be the case, then the entrepreneur is becoming an endangered species at a time when we need them most.