Many lenders we work with are more concerned with filling a niche or providing an alternative interface, a different user experience, in order to stand out and find the right customer. So what you get is a lot of great lenders with great products and great engagement with clients, but the numbers don’t have so many zeroes at the end. And they freely admit they can’t solve the funding shortfall all by themselves.
Around the turn of the decade Britain’s banks were lending £80 billion per year to SMEs across the UK. All the peer-to-peer platforms combined currently provide between £1 billion and £2 billion. As alternative funders argue over whether the term “alternative” is fair and helpful any more, one part of the definition of the term is still tied up in scale.
High street banks are actually working alongside the challenger banks and the Association has always worked with traditional funders alongside the alternative lenders. We are not here to champion either “side”. In any case, scale is immaterial if small businesses aren’t borrowing from anyone but themselves. They often finance themselves out of their profits.
Shyness to borrow might stem from the bad press that indebtedness has had since long before Shakespeare’s neither-nor advice on the subject, and because owing money starts looking like an extra cost first, an extra income source second. Another reason might be because if a business is growing organically, out of its own profits, why would the owner suppose that the business is growing “too slowly”? Easier to revise your expectations to match reality, than to take out a loan simply to inflate reality in order to beat predictions.
We’ve been approaching this problem from the position that says borrowing to grow faster is the smart thing to do. There is, however, another way to achieve the same goal of growth. Small business who pay less tax will do what they have always done – reinvest in themselves. The net result is as if they have gone for that loan. And in effect, this result could be imposed on them, by tax law changes, rather than incentivised as we are aiming to do with a message from our local friendly broker.
Of course, as far as HMRC is concerned, this tax law change idea is about as likely as a Best Actor Academy Award for Adam Sandler. It’s completely out of line with HMRC’s take on VAT, for instance. But adjusting for inflation, even if our members report doing £29 billion business in 2015-16, that would only show that the industry has stood still. What has actually happened is that we are likely to report a total some way shy of £20 billion because both demand and supply are in a phase of regrowth from a low starting-point. This is why, in a blue sky sort of way, a tax law change would be a very welcome component of the right answer.
