How new alternative finance laws will impact SMEs

By Conrad Ford | 20 August 2014

Chancellor George Osborne and the UK government are aiming to introduce new laws that will oblige big banks to point their rejected business loan customers in the direction of other options and alternative routes to funding. The news is being welcomed by most with an interest in the SME sector, which has seen funding from traditional lenders dry up to a reluctant trickle in recent years. 

At the heart of what looks to be incoming legislation on the subject will be internet solutions, with the new laws set to specify that banks must show would-be SME borrowers where exactly online they can find more information about alternative finance for businesses.

What kind of impact the new laws will have in practice and how easy it will be to ensure that banks are sticking to the new rules remains to be seen. But there are sure to be some wide-reaching effects for SMEs in the UK, so here’s a look at what they are likely to be.  

Greater awareness

The primary aim of the draft legislation is to make sure that SMEs and their founders, managers and directors are made more aware of the funding options available to them. This might seem like a straightforward goal to achieve but there is in fact a striking lack of awareness among SME stakeholders that borrowing from banks is not the only way to raise funds.

To date, awareness among SMEs of alternative funding solutions has remained stubbornly low, even in light of the mainstream banking sector’s dramatic retreat from the scene over the course of recent years. Therefore if banks can be persuaded or forced to tell their rejected customers where to look online for alternative options, the SME sector stands to be much the better for it. 

A stronger SME sector

It would be difficult to overstate the importance to the British economy of having a vibrant SME sector but without access to funding and finance progress is very difficult to achieve, even for the very best small businesses around. Even small sums of money can be the difference between survival and failure for SMEs across all sectors, which is why the bank’s lack of lending has become such a cause for concern for the government.  

At present, banks are proving very reluctant to lend any amount of money to SMEs with any record of financial difficulty. The hope for the government and for the wider economy is that SMEs will increasingly succeed in finding the funding options that can keep them in business during times of difficulty or distress. It’s only when that kind of support and opportunity is routinely available that the UK’s SME sector will really begin to flourish.

More advice needed

One issue that will need to be faced if the government is to succeed in seeing its new laws boost the prospects and performance of SMEs in the UK is that they will need more expert advice on the alternative funding options available. There are more ways than many people think for small or medium-sized companies to find financing but without the right support the process can be difficult to navigate effectively.

The variety of viable alternatives to mainstream lending continues to grow and many are easily found online but without the right guidance through the process it will be difficult for small companies to really understand their options and make the most of the opportunities available.  

Competition will intensify

The underlying reason why the government is stepping in to shake-up the SME funding market is that it is currently uncompetitive, with the big banks still accounting for roughly 90 per cent of the business loans market across the country. So one consequence of the incoming laws ought to be that a growing number of alternative finance companies emerge or grow significantly in scale as the new legislation takes effect. 

Greater competition for customers among providers of lending functions, both within the mainstream and the alternative ends of the market can only be good for SMEs and it is a fundamental aim for the government. Information sharing and online platforms bringing businesses and alternative funders together will help intensify that competition as the market as a whole begins to take off. 

Tech to play a key role

Whether it’s through crowdfunding or peer-to-peer lending, or it’s via invoice auctioning and discounting, technology stands to play a very significant role in the future of the way small and medium-sized business are funded.

The dynamics of the market have emerged as a response to demand from SMEs who have found it difficult or impossible to access finance through traditional means. The result has been a vibrant variety of flexible solutions that aim to facilitate mutually beneficial scenarios on the part of borrowers and lenders. This trend is only likely to continue as an increasing range of platforms succeed in forging out a key space in the market for SME funding and alternative finance. 

 

By Conrad Ford, Managing Director, Funding Options

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