Article
Written by Molly Rumbelow
Posted on 16/04/2018

Greater costs and less clarity. Why are businesses still looking to traditional bank loans for their funding needs?

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If you were an SME rejected for bank funding 15 years ago, could you have imagined a world where that wasn’t your only option? Whether you’re after more of it, want to spend it in different ways, or just want to manage it better, the 2008 crash opened up more opportunities than ever when it comes to managing money. 

That’s where alternative finance comes in, and, as we’ve seen from the previous article – it’s big business. The success of the sector has been down to a flexible, customer-first approach that could only have been dreamed about by those trying to access funds in the past. 

So why do we still see stats that tell us that eight out of ten SMEs prefer traditional bank funding to this new wave of easily accessible finance? 

You may be tempted to blame a lack of awareness as the reason for this. After all, with marketing budgets the size of a small country’s GDP, the big four banks can extol the virtues of traditional funding facilities through every channel available. Following a pretty seismic downturn in lending following the 2008 crash, banks are now tripping over themselves to prove they are ‘open for business’. This means more lending messages than ever before, with loans and overdrafts being the most heavily promoted. On top of this, they have also been able to take advantage of the longest period of low interest ever, making it cheaper than ever for them to provide credit.

But, research carried out by Tindall Perry suggests that lack of awareness is not to blame, with 74% of finance directors describing their knowledge of alternative finance as average or above. So why did only 15% of the same group say they would be comfortable accessing crowdfunding or peer-to-peer (P2P) lending?

Firstly, we have to understand the difference in the track record of alternative providers vs. big banks. Although we’re seeing positive sentiment in the market, we’re dealing with companies in the alternative finance space which have only been around for seven or eight years. In contrast, some banks have been proving their services for over 250 years. 

Another factor is the (lack of) speed at which businesses adopt innovation. Although the ‘information age’ has seen an unprecedented rate of technological change, it seems that in terms of business, the rate of adoption has not matched that of the consumer world. In fact, one in five businesses still rely on fax machines to conduct business, giving us some indication that the waters of business change run a little slower than those of consumers. This goes some way to explaining their bias towards traditional funding sources.

While alternative providers can’t fast forward 200 years into the future and create the same history and track record that bigger banks can provide, or personally pull every business up to their level of innovation – there are routes to changing perceptions. 

First on the list will be to increase understanding of the potential benefits of alternative providers. Given the changing business landscape we find ourselves in due to Brexit, businesses understandably want to keep risks to a minimum. Changing funding source at an uncertain time could be the difference between healthy working capital and a liquidity crisis for an SME. Demonstrating to businesses that they can enter an alternative finance arrangement knowing the exact risks, implications of these and subsequent mitigation strategies will go a long way to allay any fears. 

Next, increasing transparency within the industry should be a priority. Showing how platforms get paid, what they get paid and by whom will build trust. After all, the adage of ‘if it sounds too good to be true, it probably is’ is still as relevant now as ever. Don’t just tell businesses that alternative finance is a viable option, show them why it is.

The consolidation of the alternative finance market will also benefit customers. At the moment, the amount of lending providers and loan terms can be confusing. A simplification of alternative finance providers and the products available will help both businesses and Independent Financial Advisors (IFAs) who are becoming increasingly more active in the SME space. 

In our final piece in the series, we’ll look more closely at the consolidation within the sector. We’ll also be looking at innovation, and what risks and implications it may bring with it. While access to funding may be changing, the need for losses to be kept to a minimum hasn’t. With paths to entry to this market becoming ever more accessible, we’ll look at how alternative finance providers can strike the balance between confidence and caution.