SMEs are finding it hard to acquire finance from traditional sources. The Bank of England reported that the request for lending grew in the first quarter, and the demand is expected to increase in the following quarters.
Even though the rejection rate is around 50%, small businesses will approach larger banks for financial lending. The problem here is that SMEs aren’t usually aware of any alternatives. Support is needed to give small businesses the resources to make better decisions for their business finance.
What can be done to improve SME finance?
The Small Business Enterprise and Employment Bill has been announced, which takes legislative action to help SMEs match the funding that the bank rejects. This is a positive step towards helping SMEs gain funding that, in turn, will boost UK growth and employment.
Other funding alternatives should not be perceived as a last resort, they should be seen as an option alongside the large corporate bank. This will allow a proper evaluation of what financial package suits the business, rather than a one-size-fits-all approach.
The idea of having a mandatory process to match SMEs that are seeking finance to a wide range of lenders will benefit the economy, as it will remove one of the highest barriers to entry for most SMEs.
Finance lending for SMEs is not just a business bank loan. It could include peer-to-peer funding, overdrafts, merchant cash advance and invoice factoring amongst many others. These alternative funding platforms offer a wide range of products which let the SME find what finance package fits their business. They can choose to go ahead with them from the beginning, or use them as the fall-back option after failing to secure funding from the banks.
Is now the time for change?
The reality is that SMEs need tailored funding to match their individual business ambitions and targets. Large banks have enjoyed a monopoly on small business funding for a long time without much competition, so now with more alternatives available, small business owners have a far better choice.