Generating loans to support your business 18/10/2018
What entrepreneurs need to take their business to the next level and what traditional lenders are prepared to finance can be very different things.
Business banking is dominated by just four providers, who run 85% of business current accounts and almost 90% of business loans. It isn’t because businesses are happy with the service they receive from the big four that allows them to dominate the market: research shows that few SMEs trust their bank to act in their best interests or to support their business. Despite this, annual switching rates are estimated at 4%. After all, given the market domination of the big four, where are you going to switch to?
That few SME owners look for alternatives is down to a number of reasons: links between personal and business accounts; the complexity of pricing for loans and business accounts, and (not least) a perception that there is little difference among providers.
There’s a growing, if belated, awareness among government and regulators that this is a problem. Bank of England chief economist Andy Haldane recently likened Britain’s business innovation to a hub with no spokes: where ‘hubs’ of innovation exist, this isn’t being spread – there aren’t the necessary ‘spokes’. There’s a number of reasons for this, not least availability of finance.
The financing requirements of SMEs are particularly important for the UK, given that 99.9% of UK private sector businesses are SMEs employing up to 249 people. However, despite the role that SMEs play in UK economic growth, many find it difficult to access bank finance.
Most SMEs whose bank loan applications are rejected are either unable to access other sources of bank finance or simply do not try and apply to these alternatives. The British Business Bank reported that 71% of small firms approach only one provider of finance.
Computer says no
Instead of being an enabler, technology has become an impediment to SME bank lending. One reason for business owners’ cynicism regarding traditional lenders is that the decision on whether to lend or not is made by an algorithm. If you fit in the right pigeonhole then you may well get the cash that you have applied for. But if you don’t – well, that’s it. And you can’t argue with an algorithm.
But innovative businesses don’t fit into a pigeonhole. At ThinCats, we often hear business owners complain that banks are not prepared to lend unless the loan has bricks and mortar or something as durable to make a claim on. How many businesses own their own premises? Hard data on this is hard to come by, but it’s surely a minority.
Algorithms may one day be smarter than people, but they’re not there yet. To recognise the individual needs of diverse businesses still needs the human touch.
That’s why ThinCats has launched the Generator initiative – targeting business loans between £100,000 and £500,000. Both research and experience tell us that this segment of the business banking market is underserved by traditional lenders – who tend to favour larger loans – and the burgeoning crowdfunding market, who tend to service smaller loan requests.
Our data shows that this population is surprisingly large: there are about 830,000 firms with a turnover of between £100,000 and £1m. Some 13% of these have outstanding debt, with an average loan size of about £290,000. Given how we’ve seen SMEs source loans, many of these should be able to restructure their loans in a way that is more suitable for their business needs. There will be many others, not captured by this data, who have been turned down for loans by their bank.
While lending decisions through Generator are informed by data, it is our regional heads of credit who make the decision. They have a wealth of experience in servicing SME capital needs, working with business owners to structure loans in a way that suits their needs. The process provides clear and transparent criteria for a quicker result on funding at a competitive price. We know that one size does not fit all.
So if you have ambitions to develop your business, and are sick of traditional lenders trying to squeeze your innovative firm into the wrong-shaped hole, we’d like to hear from you.
 BIS RESEARCH PAPER NO. 270 SME lending and competition: an international comparison of markets MAY 2016 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/522490/bis-16-105-small-and-medium-sized-enterprise-lending.pdf#
 SME lending and competition