With Brexit on the horizon, the volatility of the U.K. financial market has created an increased demand for more flexible financing among small and medium-sized enterprises. But a decade on from the 2008 financial crisis, the loans available for SMEs are still restricted by regulations on the total amount of capital that banks must hold.
This has led to the rise of investor-backed alternative lending platforms such as Funding Circle, which offers term-loan propositions, providing capital upfront that is then repaid over a fixed time frame; and Growth Street, which offers a line of credit that SMEs can flexibly dip in and out of when they require it.
“Since 2009, the total amount of bank lending available to SMEs has come down by over 40 percent at a time when the SME population in the U.K. has increased by about 30 percent,” said Greg Carter, Growth Street's CEO. “So you’ve had this huge gap open up in unmet demand. We’ve calculated that on the banking overdraft product alone, that gap amounts to around £22 billion.”
The need for flexible financing has become particularly acute in the current financial climate, which has led to the emergence of a new business model dubbed the "balloon business" by the insurance firm Direct Line for Business. According to a report published by Direct Line this year, 74 percent of SMEs have structured their business to scale up and down with market fluctuations, and the resulting ebbs and flows in revenue streams.
“Small firms have the flexibility to expand and shrink with the market, but what this means from a finance perspective is that there’s an increased need for funding as and when these changes occur,” said Robert Blackburn, director of the Small Business Research Centre at Kingston University.
As such, increasing numbers of firms are turning to platforms like Growth Street, which caters to a wide range of SMEs, offering credit limits from $30,000 to $3 million.
“Our clients are typically employing 10-20 people, and growing at around 20 percent a year, with turnovers of around $3 million to $4 million,” Carter said. “They’re all profitable clients, with the common frustration of managing uncertain cash flows. The economy has only got more uncertain over the last two years, and looking ahead to 2019, we have a number of key challenges which businesses need to navigate. So we’re seeing more and more businesses looking for flexible facilities which give them the confidence to trade through a variety of different economic conditions.”
This new model of lending has been facilitated by a range of technologies that have emerged in the past five to 10 years, from the Faster Payments network, which allows for the rapid movement of large quantities of money in and out of business bank accounts, to open banking. In particular, industry insiders predict that open banking will transform the lending market in years to come, with data sharing enabling non-bank lenders to gain a better understanding of the financial needs of different SMEs, and then provide them with faster access to credit, at better rates.
The Federation of Small Businesses hopes open banking will lead to increased competition in the alternative lending space, and possibly even automate the way in which SMEs receive credit. “The market is complicated and at times confusing for small-business owners, so many aren’t actually aware of the options they have,” said FSB policy adviser Lorence Nye. “Open banking will start to help with that. … Ideally there’ll eventually be a solution where a business owner can connect their company details through Open banking, and then receive a list of different appropriate options, at different rates, and they can easily identify how they compete with each other.”
Carter agrees that open banking is poised to transform the market.
“It’s still early days in terms of the whole industry,” he said. “There are not many adopters of open banking technology within their underwriting and credit decision-making. But over the next five years we think this will change as more and more businesses get used to sharing their company data in return for more access to credit and better prices.”
