Recent studies have shown that SMEs are struggling more than ever to access finance – what should be done to help? What does Hampshire Trust Bank do differently from other lenders?
A study by the Enterprise Research Centre published in June revealed access to finance to be the biggest barrier to growth for around a quarter of all business. In addition, recent figures from the Department of Business, Innovation and Skills (BIS) highlighted that seven out of 10 SMEs that are refused a loan do not go on to raise alternative finance, a clear cause for concern given there are an estimated 5.2 million small businesses representing almost 50% of the economy and almost half of private sector turnover.
It’s not all doom and gloom however, the increasingly significant role of start-ups and SMEs prompted a series of pledges from the government designed to support growth and expansion. This has included commitments such as tripling the number of start-up loans to businesses to 75,000, reducing red tape by £10bn and the introduction of the Help to Grow scheme.
Despite these measures, frustration from alternative finance providers and SMEs alike was felt earlier this month when it was revealed the government’s promised bank referral scheme to help suggest alternative finance options to those refused credit had not progressed despite being launched a year ago. We need the firm delivery of pledges like this, and to continually address the educational challenges that remain for SMEs to understand their full range of options when seeking access to finance, prevalent given that 70% of SMEs seeking Bank Finance approach only one provider and 90% stick with the provider of their current account.
The success of Hampshire Trust Bank can be attributed to not only having expert teams who adopt a traditional and personalised approach, but in being an SME ourselves (we were effectively a start-up business just over a year ago), which enables us to identify with the needs of our customers. Understanding the limitations of smaller and early-stage businesses is crucial, and we believe that every customer should be treated as an individual and assessed accordingly. Our smaller size also means we can be more responsive and agile in adapting to the changing requirements of our customer base.
The term ‘challenger bank’ is becoming one to watch – why do you think SMEs are looking away from the Big Six?
For too long, the UK market has been dominated by larger lenders who between them have controlled the majority of the personal current account and small business banking sector. When times get tough, mainstream lenders tend to reduce their appetite for risk and this in particular has contributed to a shift in the UK lending market.
Quite often, SMEs don’t meet the strict lending criteria set out by some of the larger banks and this has increasingly driven demand for more customisable solutions, therefore paving the way for the emergence of alternative finance providers who are bringing with them a diversification of products to service those businesses that have largely been neglected by bigger UK banks.
In addition, regulatory and political efforts to introduce more competition in the banking sector has resulted in alternative finance fast-becoming the destination of choice for start-ups and SMEs who may have for years been plagued by access to available cash flow.
Our customers tell us the ability of challenger banks to offer specific lending products and a more personalised service is an increasingly attractive proposition for them.
Do you think the SME funding landscape is changing, and why?
It’s well known that around half of new businesses fail within the first two years and most of them don’t last five years. But with SMEs being the engine room of the UK economy, there is increased emphasis on ensuring they have access to the finance and capital they need to grow, creating a consistent demand for new and innovative funding channels.
One area we are seeing a surge in popularity in is asset-based finance which has almost doubled to a record £88m compared to a year ago. This process involves a business borrowing against the value of its inventory, and demonstrates the appetite among SMEs to move away from traditional debt facilities such as loans or overdrafts, in favour of finance that is tied to their business.
It is smart business sense not only for SMEs to recognise the value of their assets and maximise them accordingly, but to pursue the right source of funding for their individual needs. Asset-based finance is complemented by the speed at which asset-based finance facilities can be agreed or extended, which can make it an ideal way for businesses to respond quickly to growth opportunities as we continue to experience an economic upturn.
What advice would you give to small businesses following the announcements made by the Chancellor in the Summer Budget?
There were two important announcements in the Budget that are relevant to SMEs; that the level of maximum Annual Investment Allowance (AIA) would be set permanently at £200,000 from January 2016, and that the corporation tax rate (CT) is set to be cut to 19% in 2017, with a further reduction to 18% for the financial year beginning 1 April 2020.
Both of these changes will provide increased confidence for those businesses looking to invest, grow and pursue job creation, and my recommendation would be for SMEs to evaluate what these changes mean for them, whether it be simply seeking advice from experts on how to make the best investment decisions, or by moving their cash in to a savings account which offers the most attractive return.
If you weren’t in financial services, what would you be doing?
If I wasn’t working in financial services, I’d probably be either renovating old properties or restoring antique furniture. These are real passions of mine. I enjoy the hands-on aspect, it’s a million miles away from sitting behind a desk. People are often surprised to learn that I can plaster and lay bricks.
