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Bringing SME finance into the 21st century

How to fix the SME financing model

Paul Surtees Aug 12, 2016

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The traditional SME financing model is broken.


While banks are repeatedly reaffirming thier commitment to funding for SMEs, with HSBC just last month setting up a £10bn 'loan chest' for small businesses, it remains very difficult for small and medium sized businesses to secure finance.

"The traditional SME financing model is broken"


According to recent research from the British Business Bank (BBB), banks still account for over 80 percent for SME lending, with 78 percent of this coming from the high street big four.  Alternative lending - such as peer-to-peer - accounted for £1.26bn of SME financing in 2015.  This is dwarfed by an estimated £163bn of bank loans and overdrafts in November the same year.


SMEs less than five years old face a reported 50 percent rejection rate from banks.


In a business environment plagued by Brexit uncertainty and regulation shakeups, the SME economy can ill afford to be dealing with funding challenges.

"We must bridge the financing gap"


Through dealing with SME owners and their accountants everyday, it is clear that there is a knowledge gap that is causing this disconnect.  While banks can provide an excellent source of funding, they are simply one of many options, and are not the right option for every business.  The challenge is that, with 78 percent of the market, banks represent the comfortable option.


In setting up Capitalise.com, my eyes have been opened to the frankly overwhelming range of tailored financing options.  71 percent of SMEs still only apply to just one lender, usually their bank.  Looking further afield is complex and opaque.  While financial marketplaces and comparison sites are making great strides in the area, it's a new phenomenon and knowledge amongst SMEs is currently limited.

"71% of SMEs only apply to just one lender"


Other areas of finance, such as cloud accounting, are already revolutionising SME business processing.  Xero, the accounting software pioneers, are a prime example of tech that is making small businesses more efficient.  The firm now boasts almost three quarters of a million subscribers in the UK alone.


This revolution in accounting is what is required in SME financing.  The likes of Xero have successfully bridged the knowledge gap to make an alternative approach common sense for SMEs.  It is through talking about these solutions that we increase awareness, but this is half the battle.


To make a real difference to UK businesses, we must improve access to these alternative SME finance sources.  Consumer finance has enjoyed a plethora of marketplaces that encourage choice for a long time.  Now we are seeing the same transparency coming to small business finance too.


With only 3 percent of UK start-ups becoming midsized, in comparison to double that in the US, it's time we picked up the pace.  The catalyst to this business growth?  A financing revolution through improved access and choice.


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