Borrowing with confidence via alternatives
by Matt McQuillan, Managing Director, C2FO
Britain’s small to medium-sized enterprises (SMEs) are turning away from the UK’s big four banks and increasingly look to alternative sources of finance, according to recently-issued data from the British Business Bank.
The state-backed development bank reports that in the first half of 2017 only 1.7% of SMEs sought new loans from the main UK banks; down from a figure of 2.9% five years ago and the lowest percentage since the annual survey was first issued in 2011. The total figure lent to small businesses by the major banks last year was flat at £165bn.
By contrast, demand for alternative sources of funding rose sharply in 2017. Asset finance increased by 12% to £18.6bn, peer-to-peer (P2P) lending was up by 51% at £1.8bn and equity investments in small businesses rose by 12% in number and by 79% in value to £4.5bn.
The report also found that seven in 10 SMEs preferred not to borrow from a bank, even if this meant sacrificing potential growth. The British Business Bank said that firms’ aversion to banks had “become entrenched” last year and that many no longer applied to them for a loan as they assumed they would be turned down.
“It can’t be overstated how important it is to build a more complete funding ladder for economically important high-growth businesses no matter where they are located,” says Keith Morgan, chief executive of the British Business Bank. “Scale-ups need more long-term patient capital throughout all stages of their development to be world-beating companies.”
The Federation of Small Businesses’ (FSB) national chairman, Mike Cherry, adds that the reluctance of many UK SMEs to seek new loans is a real concern. “We’re lagging behind the US when it comes to venture capital investment in businesses to the tune of millions,” he says. “That has to change.
“Lots of small firms simply aren’t up to speed on all of their options. Increasing numbers are applying for asset-based loans and exploring the P2P route, which is encouraging.”
Increased liquidity needs
The third edition of C2FO’s annual Working Capital Outlook Survey found that SMEs in the UK and Europe’s three other main economies and also the US, China and India reported an increased need for liquidity in 2017, which needs to be met with good access to affordable working capital.
SMEs surveyed by C2FO identified their top priorities for employing additional cash flow as:
- Purchasing more inventory or equipment.
- Expanding their operations, including exporting to new markets and opening new locations.
- Creating contingency plans to deal with unexpected events.
- Investing in their employees via hiring, wages and benefits.
The survey outlines how the new financing alternatives and fintech trade finance options being used by SMEs fits with these priorities:
Supply chain financing
Also known as reverse factoring, SCF involves third parties funding early payment to SMEs on invoices to large corporates in exchange for a fee. The ultimate corporate customer pays the third party when the invoice is due. Funding can scale depending on the SMEs receivables and once a supply chain finance system is set up, SMEs can access it as needed.
These allow large corporates to make faster payments to their smallest of SME suppliers, even those that don’t typically accept credit cards. The utility of procurement cards is limited to small suppliers who agree to participate in a specific card network. They don’t offer any potential for discount income generation, but instead provide an annual rebate to customers.
Factoring and invoice finance
An attractive option for SMES with large amounts of account receivables, which enables them to sell their receivables to a third party at a discount in exchange for immediate cash. Factoring is a relatively easy source of funding with a short lead time, but typically also involves less competitive interest rates as well as fees.
Invoice discounting transactions occur directly between SMEs and their customers via fintech platforms such as C2FO. They carry competitive interest rates as suppliers are merely accessing funds they are already owed. C2FO’s working capital marketplace also gives SMEs the flexibility to choose which invoices to accelerate, the size of the discount and the speed of the discounted payment, via an easy-to-use online and mobile platform.
Private funding options include personal loans from friends or relatives and funding rounds via venture capital and investors. Securing private loans can be time-consuming and rates can be high. Private funding is less reliable as other sources of funding for ongoing operations and expansion that SMEs need due to its long lead time.
Peer-to-peer lending is better suited to specific, one time projects than ongoing financing needs as most platforms require lending applications for each specific funding request. Funding can be quicker than traditional lending and rates reflect the SME, its financing needs and the interested investors.
(The complete C2FO Working Capital Outlook Survey: 2017 Insights may be downloaded from: https://c2fo.com )
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