With 5.6M SMEs (firms with 0-249 employees) in the UK, representing 99.9% of all businesses, employing 24.3m people and delivering 51% (£1.9 trillion) of gross turnover, the importance of SMEs to our economy cannot be underestimated.
A recent Federation of Small Business (FSB) survey suggested that access to finance remains a key concern for small to medium size businesses in the UK with only one in eight seeking external finance. With over 50% of small businesses (50.4%) looking to expand in the next twelve months, despite ongoing economic uncertainty in the UK, the tension between these aspirations and access to finance is worth considering in more detail.
Strong survey data, such as the British Business Bank Business Finance Survey, seems to corroborate anecdotal evidence that business leaders and entrepreneurs do not consider fully, or at least are not aware of, their options when looking to grow or invest in their organisations. Outside of standard term bank loans, overdrafts and credit cards, most SMEs have limited awareness of other available products and, more worryingly, their access to and awareness of providers of such products is significantly lower still.
This is reflected in just how many SMEs still rely, almost exclusively, on their own bank for access to finance. A 2016 “SME Attitudes to Finance” survey by Wesleyan Bank demonstrated that 63% of SMEs would feel comfortable borrowing from their bank but this drops to 24% with regards to using an alternative finance provider. Around 80% of bank applications are successful (although this drops to just 50% for first time applicants) but that still leaves about 80,000 failed applications each year and a funding gap of £3.2bn in the UK. In this context, it is perhaps understandable why so many economists regard this gap in funding as a major brake on prospects for SME growth in the UK.
It has been suggested that perceived difficulties in securing alternative finance is also at play in the minds of SME leaders. Again, the evidence seems to support this with the British Business Bank survey reporting that 56% of SMEs described their perception of obtaining external finance as ‘difficult’. It is reasonable to assume that demand for alternative finance is artificially suppressed amongst these businesses with a subsequent impact on SME opportunity for growth or assistance with cash flow.
Fortunately, the reality is much more positive than the perception and, for those prepared to investigate options other than their bank, there are some real opportunities to reduce their reliance on their primary funder and to access exciting alternatives often on much better commercial terms than their bank can offer. But where to start?
As a starting point, my advice to any SME is to find an expert and specialist finance partner to work with. Often, for investments, manufacturers and suppliers will be able to recommend potential providers whilst industry bodies like the National Association of Commercial Finance Brokers (NACFB) can help too.
Look for a partner that is well established in their field and financially strong –good indications that they have the experience, systems and skills you should be looking for. Make sure that they are fully accredited – The Financial Conduct Authority (FCA) took over from the Office of Fair Trading back in 2014 and they operate a robust permissions system which all credible players will have in full. Be wary of operators acting as agents of others and not actually having full FCA permissions in their own right.
It is increasingly important to make sure that the provider can offer a true “whole of market” approach and is entirely independent. Although most companies in the field run their “own book” (where they provide the finance rather than a third party institution) this should not be artificially promoted and should be balanced by an extensive and broad funding panel. For instance, in our case, our own book accounts for less than 5% of the overall business we write, good evidence that our solutions are driven by the client need and not ours. Meanwhile our funding panel is approaching 60 banks/funders of which over two thirds are not directly accessible by UK businesses. Look for a partner who can offer you this level of true added value.
For asset finance, choose a partner that can demonstrate a broad base of assets that they can support and knowledge of your industry or sector. For example, we have specialist divisions such as technology (where we even fund 100% software projects), interiors (financing the entire costs of fit out including labour and fees) and Health & Fitness (everything from gyms through to medical equipment).
Ideally, look for a range of debt finance solutions (such as asset finance, cash flow finance, VAT/tax loans, bridging finance etc.) from your chosen partner as the relationship you are forming should be one that will last for the long term. Ideally your partner should be able to support you with different facilities as the needs of your business develop and change over time. Flexibility might not seem so important at first when you have a specific need in mind, but it will be at some point.
Last, but not least, make sure you can work with them. Trust is important in all business relationships but never more so than when dealing with finance. Do they take time and effort to get to know you, to understand your business and make sure they maximise the chances of securing the facility you need? If it’s just about the numbers (or worse still just the dreaded online portal), think carefully if this is really what you are looking for.
Although success can never be guaranteed, spending a little time to get the right partner will absolutely make a difference. We are really proud that over 92% of applications that we propose are successful and, over the last 23 years, we have secured facilities that have helped over 10,000 UK SMEs protect their cash flow and achieve their growth aspirations. For our SMEs, securing finance through alternative funders other than their bank is pain-free, speedy and on the best terms available in the market.
If you would like to know more about how we can help you, we’d love to hear from you.