Since 2009 many banks and those in the UK in particular, have come under pressure to increase their lending to the small and medium enterprise that makes up the majority of businesses (in terms of absolute numbers). Despite popular and government pressure SMEs are still finding themselves unable to access the funding they need to invest and grow.
According to the Department of Business, Innovation and Skills the UK’s SMEs employ 14.4m people, account for 99.9% of all private sector businesses and 48.1% of private sector turnover. It’s not surprising then that the government has made restoring access to finance for small businesses a priority with policies such as the Funding for Lending Scheme (‘FLS’) aimed at encouraging lending by major banks.
Unfortunately FLS has been criticised for failing to open up access to credit for those small companies who are most in need, instead simply making finance cheaper to medium sized companies which already had access to credit, leaving millions of smaller companies struggling to secure funding.
There is often a suggestion in the media that large banks simply aren’t interested in lending to SMEs but the reality is that banks aren’t missing out on this vast market out of choice. Large banks simply aren’t able to provide loans for less than £50,000 on a profitable, sustainable basis and these are the loans that SMEs, by definition, are most likely to require and be able to service. Banks are restricted by the high cost of serving smaller loans compared to the returns they generate. Legacy systems that are not geared up for smaller growth companies and relationship management models that are not focussed on the SME market dramatically increase the cost of lending.
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The difficulties faced by SMEs in accessing finance are exacerbated by the lack of awareness of alternative funding sources. A recent National Association of Commercial Finance Brokers (NACFB) study found that only 6% of SME directors are aware of non-bank finance options and what they can offer. High street retail banks dominate most people’s perception of both corporate and personal lending reducing the likelihood of SMEs looking for finance where it is most readily available.
There is a wide range of alternative and non-bank finance options on offer for companies from leasing to peer-2-peer lending. All of these offer solutions to particular funding problems depending on the size and purpose of the loan required. The leasing and asset finance industry is the most established form of non-bank loan lending for small and medium corporates providing more than £22.4bn of financing per year to businesses and the public sector.
Unlike the high street banking market, asset finance is a highly competitive industry with a large number of finance companies participating. This has resulted in competitively priced products and residual values. Most operate an “indirect model” where finance brokers work with manufacturers, distributors and suppliers of business equipment to facilitate a sale by providing a specific solution to SMEs’ financing needs. The number and variety of funders and brokers means that there is a diverse set of risk appetites and as a result the vast majority of transactions will “find a home”.
However, what sets leasing and asset finance apart for SMEs is the comparatively small sums which asset finance funders can provide. At Investec Asset Finance, we deal with approximately 200 brokers and have provided nearly £1.5billion of funding to “SME Britain” over the past six years through more than 65,000 transactions. We can fund transactions as large as £10m but, more importantly, a modern system and close working partnerships with brokers results in a significantly lower cost to serve per transaction allowing us to fund transactions with values as low as £1,000.
Awareness is central to SMEs being able take advantage of the opportunities on offer and we are working closely with the NACFB to increase awareness of the availability of asset finance and leasing through the www.findSMEfinance.co.uk website. We believe that if small company directors were aware of this form of finance and the network of finance brokers that source it, they would potentially have the confidence to make an investment decision, win new contracts and create extra jobs.
If small and medium sized businesses are to begin investing and growing again it is the role of governments and the finance industry to ensure that they are able to access the full range of funding options available to them. That depends both on encouraging banks to lend and communicating that corporate funding means more than high street banks.
By Mike Francis, Head of Asset Finance, Investec