A lack of understanding by UK SMEs about alternative finance options could end up costing the economy £20 billion by 2020.
A study by GLI Finance and Cambridge University centre for Alternative Finance has revealed that 80% of funding lent to SMEs has only come from four UK banks. 56% of the SMEs surveyed said that they were not familiar with an alternative form of finance despite there being many on the market.
The report was supported by the Federation of Small Businesses, British Chamber of Commerce, National Association of Commercial Finance Brokers, Asset Based Finance Association, Innovate Finance and techUK. They have insisted that the government should “reduce concentration risks in the credit ecosystem” so that the economy is protected from any losses.
Now we’re being warned the economy could suffer £20 billion in losses by 2020 if traditional lenders carry on withdrawing funding. Head of public affairs at GLI Finance, Dr Louise Beaumont has said that those in alternative finance are playing a “crucial role” towards the growth of SMEs (SME jobs make up 65% of employment in the UK) because they are supporting the increase of their turnover and profit whilst they employ more people.
She continued to say;
“The industry has started to fill a vital credit gap as traditional lenders have retrenched from the market in the wake of financial crisis.
“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.”
The research imitates the results of provisional findings of the Competition and Markets Authority’s (CMA) analysis exploring SME banking. It found that in October ‘the watchdog’ exposed that Lloyds Banking Group, HSBC, RBS and Barclays make up for 80% of the business current account sector, which generates £2.7 billion in revenue annually.
Funding Options, GLI Finance’s investee has found that banks have taken out £5.7 million per day just in overdrafts for small businesses since 2011. This has taken away the credit available to £12.5 billion, a £8.4 billion decrease (from £20.9 billion) the cost to the economy has been estimated at £2.9 billion.
According to the report, businesses in the North of the country are more than twice as likely to have had an overdraft facility removed or decreased because 55% of the businesses are looking at credit cuts, whereas only 25% of London businesses face these cuts.
The study has made it clear that alternative financing needs to be more commonly known about. It is significant for all business, including SMEs to know what their other funding options are. The report has called for a “well-resourced awareness campaign” which has the aim of improving SMEs understanding when it comes to alternative finance.
Dr Louise Beaumont continued to say “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 economy 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 efficiently 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.”
Backed by the Department for Business, Innovation and skills (BIS), the Small Business Enterprise and Employment Act 2015 became a law this year. Within the act there are several measures to benefit SMEs and their access to finance. Banks are required to forward on information about SMEs that have been declined for a business loan to alternative lenders so that their needs can be met elsewhere.
The rules surrounding accessing SME’s credit data has been restructured, the BIS believe it will give banks and alternative lenders a fair and equal chance. Head of Businesscomparison.com, Philip Brennan added;
“Small and medium-sized businesses no longer have to rely solely on the banks. Alternative lending is providing an effective and fast funding stream for them. At Businesscomparison.com we welcome a more competitive marketplace for UK businesses – that’s why we launched our website to find them the best deals on loans, commercial mortgages, invoice and asset finance.”