Funding – Where do you go When the Banks say No?
Since November 2016, as part of the Small Business Enterprise and Employment Act 2015, the UK’s nine major banks are legally required to refer SMEs they refuse to finance to an alternative provider. The last figures published in August 2017 for the first nine months of the scheme were quite unimpressive: less than 3% of small businesses referred to alternative lenders via the bank referral scheme were funded. Therefore, only £4m worth of funding deals were completed in the first nine months of the scheme.
The funding gap is nowhere more evident than in the construction sector: according to a recent survey by the National Builders Association, availability of finance is the single greatest issue many SME property developers face. Bank of England data shows that bank lending to SME construction companies amounted to £6.6bn in 2017, only modestly up from £6bn in 2016. The government’s targets of building 300,000 new houses per year over the next five years, with an assumption of £80k per house, equates to circa £20bn per year needed to achieve the target. Current lending from mainstream banks leaves a big gap in the property finance market and traditional lenders cannot deliver. This is where the new breed of lenders and Fintech firms come into play.
Previously, everybody knew their local bank manager and scheduled a meeting when needed. Today the reality is rather different, with the bank manager on the verge of extinction. Business owners need other avenues to access the finance required to grow their businesses.
We have seen this across several of our recent cases. The borrower is an experienced developer operating in a niche market and traditional lenders are no longer active due to changes to their criteria. Peer-to-peer (P2P) lenders can successfully fill in the gap and support SMEs.
The key is to understand that both traditional lenders and P2P platforms have their own unique strengths and are better off working together as partners to deliver the products or services that meet that customer’s needs. As Helen Keller, the American author, political activist, and lecturer said, “alone we can do so little, together we can do so much”.
Being declined by the mainstream does not mean that the SME is too high-risk; it is likely that these lenders are merely changing their requirements. There is also an important message to peer-to-peer lenders: higher return does not always mean higher risk. Fintech has already been harnessing a force for good, enabling positive change in industries such as retail, banking, trade, health, employment and education. Now the establishment of a strong P2P investment framework and associated technological platforms is enabling a conductive environment for financial inclusion of SME property developers.
Using a commercial finance broker, like MHA Financial Solutions, is proving to be more of a successful avenue for businesses. According to the National Association of Commercial Finance Brokers (NACFB), business lending via brokers has increased by 20%.
Adam Tyler, Former Chief Executive of the NACFB, said “Availability of funds is no longer the issue, but there are still significant barriers facing SMEs who are looking for finance. Foremost among these is awareness. Small businesses don’t have to rely on their high street bank for credit, but few are aware of the full range of alternatives out there – or that an independent broker will be able to match them with the best lender for their needs.”
MHA Financial Solutions Ltd is authorised and regulated by the Financial Conduct Authority [FRN: 667874] and registered with the Information Commissioners’ Office (ICO), Reg No. ZA086744
This article featured in issue 9 of our construction and real estate newsletter series. Read the full newsletter here: Real Estate Matters Issue 9