The changing face of small business finance

Business Insights

31/05/2017

As ART Business Loans celebrates 20 years of providing access to appropriate finance for businesses unable to meet their needs from the banks, Chief Executive Steve Walker reflects on the changing face of small business finance.

The overriding question has to be: are businesses better served than they were 20 years ago? The answer must be, overall, a resounding yes - with so many more alternative and additional sources of finance available to support their needs than there were in 1997. However, if you look more closely, you will see it might not be the case with all sectors and types of business.

20 years ago the major source of finance for all businesses, and probably for the vast majority the first point of call to for finance and advice, was the Banks. But 20 years ago they were already starting to move away from supporting the small business sector with the standard overdraft and loan. If you had a strong balance sheet, growth prospects a good track record - and in many cases tangible security - you would be assisted. This is still true today. But the banks were starting to use methods that would over the years become more common and the dreaded words (of ‘Little Britain‘ fame) “the computer says no” were starting to be heard.

The Banks today are still far and away the largest provider by amount to businesses. However, at the small business end they have decided to move away from the high-risk areas: start up and early stages businesses and also the micro business sector. That move has led to the creation of a large number of alternative funding suppliers.

The emergence and growth of the responsible finance sector, concentrating their loan offers after a bank decline, has been followed by the growth of alternative funders operating in direct competition to the banks. Lenders in the former category can be found at www.responsiblefinance.org.uk. The latter category includes peer lenders, invoice discounters, crowd funders and specialist asset finance schemes to name only a few. Many of these, however, only lend after a business has been established for two years minimum and only at higher levels. Public sector supported schemes have also emerged, including the national start up loan scheme, which, is Government, funded and locally delivered.

It has become the norm for a business to meet its financial needs from a number of sources in a package of finance. What has now emerged as the major problem for businesses is where to find the information and advice in the maze of different sources.

The best starting point has to be the ICEAW and British Business Bank guide, which has been recently updated and is also online at www.thebusinessfinanceguide.co.uk. This contains explanations of the various sources and contact points for further information.

In addition 38 Growth Hubs have been established in Local Enterprise Partnership areas, which should be a source of local and national advice. My own experience suggests that these are varied and could do better.

The worst place to look can in fact be what is the easiest and most used - and has emerged over the last twenty years - the internet. This statement is made as a warning that businesses should not go to the first place in the rankings (not think of as it ‘trip advisor’) as this spot is likely to be held by the businesses with the largest marketing budget and these are usually not only not the most appropriate but also likely to be the most expensive…….think Wonga.

The other major trend, especially in recent years, is the use of personal finance rather than business finance for supporting start up and early stage businesses. This also, of course, only extends to those with a good credit history for credit card usage. There can be little doubt that with interest rates at record lows that this is a benefit. However, in my view it has a major downside, which is that the business owners do not receive any advice with the money and so their plans have not in any way been ‘tested’ for robustness by a third party. I suspect this means that the ever present high level of failures in the start-up market will continue in the years ahead.

One of the future challenges, which will undoubtedly emerge, is related to the UK’s exit of the European Union. For the past 20 years, many of the gap-financing schemes and grant schemes that have been made available to support small businesses have been provided by EU funding. So what, if anything will future Governments do to replace that? In the scrap for funding I can only hope that the small business sector is not forgotten.