In essence the (prosaically named) “UK SME Finance Referral Scheme” basically means that soon banks wont be able to tell SMEs to bugger-off any more (which was the reality behind the prosaic (and often very slow) “loan application declined” formula). Rather banks that turn down loan requests will need to direct SMEs to a portal(s)/alternative finance providers.
This market is far more diversified than fintech folks might imagine – for example the challenger banks Aldemore and Shawbrook have each individually lent more than the entire P2P industry. Last year Funding Options referred SME borrowers to 50 different providers of finance (in one case saving 100 jobs). They believe that this number is well in excess of any other players, but even then estimate that they have only addressed about 20% of the possibilities.
As you might imagine whilst the concept is simple the implementation of the scheme is tricky and complex. Conrad has been one of the key players advising the government in this context and Funding Options are one of the possible portals.
Conrad discusses the scheme and in the process covers the SME funding market – there are possibly more providers in the UK than in any comparable market in the world.
Key topics are:
– there is a government quarterly survey of about 5,000 SMEs so the funding behaviour of SMEs is now well understood (as opposed to being somewhat anecdotal in the past)
– many of the standard media criticisms of banks have been found to be wrong
– in round figures something like 70% of SMEs get turned down for loan referrals and 40% just give up completely at that point
– others (“discouraged demand”) don’t even apply in the first place due to a perception that the banks won’t lend to them
– it was generally held that a lack of supply of finance was the problem (hence the “funding for lending” program; the British Business Bank pumping money through (already successful P2Ps) to name but two governmental initiatives)
– however this is now known not to be true – there is plenty of money out there seeking high returns – “there are plenty of [institutions] queuing up to lend to SMEs”
– it is apparent that there is an information gap about how many possibilities are out there; the amount of time it currently takes to do the research oneself is utterly impractical
– the “portal(s)” as the solution to this gap; right now various concepts of a “portal” exist from “information/education based” sites to more “tech” solutions such as Funding Options (whose tech approaches this issue rather like a dating/matching problem)
– working capital as a key problem area (property and asset finance being better served by traditional brokers); there are however dozens of ways of solving this key problem
– whilst BigCo poor treatment of SmallCos (re payment terms) is a key issue, only half of SMEs are B2B and only half of those will be dealing with big companies or the government (and the government is now a timely payer); net net it’s a big problem for about 0.5million firms out of a universe of about 5million
– the heterogeneous nature of SMEs – by activity, by type of financing required, and by size (the government is aiming at SMEs covering an enormous range of turnovers from £0k to £25m)
– the timetable for the legislation (which has cross-party support) and the process for selecting the portal(s)
– the banks are positive about this scheme (as it strengthens their customer) unlike the impression given in the media
– regulatory problems that hold banks back from referring SME borrowers elsewhere at present
– where banks’ oldskool credit mentality is holding them back
– an understanding of why the “last mile” problem with SMEs is so difficult (the cost and practicalities of marketing to them)
Overall my over-riding feeling was how the financing possibilities are far more diverse than I had ever imagined and that the whole scene is so complex one needs an expert as a guide (whether old-fashioned broker or new-world tech platform).
A very educational episode!