David Prosser: The big banks are right to feel nervous about alternative lenders as new legislation looms
Small Talk: Treasury has pledged to act under forthcoming Small Business, Enterprise and Employment Bill
The stranglehold of Britain’s biggest banks on the small business market looks set to loosen a little further thanks to reforms finally unveiled by the Chancellor.
For months, Vince Cable, the Business Secretary, has been pressing George Osborne to introduce new regulation that would force banks which reject loan applications from small and medium-sized companies to refer them to alternative sources of funding. Now the Treasury has pledged to do so under its forthcoming Small Business, Enterprise and Employment Bill.
The move represents a victory for Mr Cable, who has had to battle something of a rearguard action from the banking sector. Banks’ public opposition to the idea has been based on the complexities of implementation, but it is also clear that the big lenders are just beginning to feel nervous about the threat posed to them by alternative finance providers.
So they should. Many in the alternative finance sector believe the legislation has the potential to prove transformational – because for all the innovation seen in areas such as crowdfunding in recent years, awareness and understanding among smaller businesses remains low.
Research published last week by Fleximize, a lender specialising in the small business sector, found that just one in four small businesses described their knowledge of the alternative finance industry as good or excellent. Just 5 per cent said they would find it very easy to find an alternative lender.
Moreover, while volumes have increased quickly, they remain tiny compared to the sums advance by the established lenders. Fleximize thinks internet-based alternative finance providers had lent a total of just over £850m to small businesses by the end of June, 168 per cent more than in September 2013. By contrast, the Bank of England’s figures suggest that total bank lending to small and medium-sized enterprises currently stands at around £120bn.
When, however, every small business turned down for finance by a bank is automatically given the option of a referral to the alternative finance sector, awareness and understanding will, over time, increase dramatically. That will eventually translate into a greater market share for the industry.
None of which is to say that alternative finance is appropriate for all small businesses – or that providers in the alternative sector will always say yes to loan applications previously turned down by the banks. But the broad range of support the Government is now giving to alternative lenders – it has even provided public money for firms such as Funding Circle to lend to small businesses – gives them a fighting chance of taking on the banks.
Moreover, the sector has geared up for the challenge. Earlier this year, seven leading alternative finance providers, spanning niches such as peer-to-peer lending, equity-based crowdfunding, invoice finance and pension-backed funding, launched Alternative Business Funding, an online platform that could offer a first port of call for businesses referred by the banks.
The portal provides a one-stop-shop guide to alternative finance and aims to guide businesses through the options that might – or might not – be suitable for their needs. The providers behind the portal account for around 85 per cent of the alternative lending market, but there is nothing to stop other lenders joining as it develops.
This type of initiative is important because it speaks to the growing maturity of a sector that now faces an important challenge. Many of the finance providers launched in this space are powered by clever technology solutions and smart marketing, but they must now prove they can achieve scale and market penetration – and that they represent more than a passing fad for a novel way of funding.
The prize for those finance providers that rise to the challenge is a genuine shot at capturing share from the banking sector, particularly given the assistance of government policy designed to give them a fair wind. And that should be to the benefit of small businesses that for too long have been poorly served by an uncompetitive banking industry.
Cash shells on junior market soar
The number of cash shells listed on the Alternative Investment Market (Aim) stands at an eight-year high, research from Growth Company Investor reveals. The study identifies 77 shell companies listed on Aim – around 7 per cent of the total number of companies on the market and up from 56 companies last year.
That’s the highest figure recorded since 2006, when the London Stock Exchange changed the regulation on its junior market in order to restrict the length of time for which a shell company may remain listed. In subsequent years, the number of shells on Aim fell sharply from the peak of 97, with new shells required to raise at least £3m.
The increase in the number of Aim-listed shell companies reflects both the launch of new vehicles that have raised money from investors and established Aim companies that have sold their operations but remain listed. The average shell company on Aim has cash of £3.3m, Growth Company Investor said.
Flexible working rules flouted
One in three small businesses is flouting new employee rights legislation introduced this summer, research indicates. Sage, the small business accounting specialist, said thousands of small businesses are vulnerable to costly legal challenges from their staff because they have failed to implement the regulation on flexible working arrangements that came into effect on 30 June.
The regulation gives workers who have been with an employer for 26 weeks or more the right to request flexible working – the rules previously only applied to parents and carers. Sage said more than 30 per cent of small businesses had not changed their policies to reflect the new rules. One in 10 small businesses told Sage they knew nothing about the change.
Rob Davis, Sage’s head of technology, urged small businesses to put their “house in order”. “This should be viewed as an opportunity, not a hurdle to overcome, as flexible working can boost to staff morale and increase productivity,” he said.
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