'Businesses need to be more proactive'
Looking for a loan? Join the crowd
Once upon a time UK banks threw a party for small businesses. It was a merry party. Everyone enjoyed playing musical statues. Small businesses loved to dance to the tune of the banks. Then the music would stop and so would the dancers; stock still as a statue. The game went on for some time. But the only difficulty was the music stopped for longer periods.
The small businesses were no longer allowed to move, run around the room and branch out as freely as they used to. They were stationary… Then one day someone called ‘crowdfunding’ showed up at the party. He played music that was more liberating and inspiring. And, most importantly, the music continued but for longer periods. The small businesses started moving again – yet this time with more vigour.
Crowdfunding for UK small businesses has momentum
So how does crowdfunding for UK small businesses work? For the uninitiated, the process revolves around the lending of money from one or many parties or crowds (investors) to other parties (borrowers). The process is typically enabled through a lending platform that allow borrowers to apply for a loan. They are then credit-assessed before their application to ensure they are in stable repaying position. And, once successful-assessed, the borrower receives investment bids before his or her pitch achieves its best target.
The Small Business Finance Markets 2014 by the British Business Bank report makes sobering reading. In particular there is a lack of understanding from businesses of borrowing options – and the banks’ own reluctance to lend.
According to the report, of the UK’s 5.2m small businesses which employ 15.2m people, only half are reluctant to borrow to accelerate their growth. And this figure might be even starker, knowing that such a profusion of small businesses has fuelled job creation.
Stuart Lunn (pictured), chief executive and co-founder of LendingCrowd, based in Edinburgh, says: “It is clear that ambitious businesses need to be more proactive in securing capital to enable them to prosper and grow in a dynamic and recovering economy. Crowdfunding or crowdlending offers small businesses a significant opportunity to secure the vital capital they need. Alternative finance, that included small business loans, accounted for less than 5% of the total lent to SMEs in 2014.”
Is there scope for SMEs to use crowdfunding to grow this year?
The question over whether there is scope for SMEs to use crowdfunding to grow this year might be easily answered. According to the BBB report, 46% of small business intend to grow in 2015 on the strength of an improving economic backdrop. Yet such growth is a complex area. While businesses are finding finance easier to obtain, 26% still viewed it as very difficult in 2014.
As a result, it may not take someone with a Dragons’ Den grasp of figures to realise that a gap remains between obtaining finance and actual approval rates. The proportion of businesses discouraged from applying for finance also remains significant, and recent data from the SME finance monitor suggested the number of SMEs in this bracket could be as large as 160,000.
Part of the evidence for growing optimism rests on the shift in the use of finance from funding working capital to funding fixed assets, which is reflecting growing capacity constraints amongst small businesses.
Currently, some 80% of SME lending comes from four big banks: RBS Group, Lloyds, Barclays and HSBC, with around 71% of applications made in the last 18 months resulting in a facility. However, for first time applicants, the success rate has been low, averaging only 38%, and yet the bulk of SMEs still see their bank as the first point of call.
Businesses looking for finance for working capital reasons are more likely to use bank overdrafts (43%), loans (31%) and credit card finance (9%), and are seeking a mean value of £92,000.
Many owners of young businesses are keen to retain control and keep costs tight. They fear that borrowing will increase the external influence on their business, and they see interest payments and charges as a burden.
SMEs are tired of having their business loan application turned down
Having spent hours pursuing a loan to then have their business loan applications turned down, owners perceive funding as a time consuming and frustrating process.
At the same time, some business owners draw on past experience of operating in tough economic conditions, particularly in the last five years, and are wary of seeking loan funding as a result. It is these factors which mean about 50% of SMEs do not use external funding.
Crowdfunding or peer-to-business crowdlending enables fixed rate loans to be quickly and easily arranged online. Using ‘the crowd’ to fund loans compares favourably with the costs and regulatory obligations of traditional lenders. And, best of all, borrowers can repay early at no cost.
Bill Dobbie, LendingCrowd Co-founder and Chairman, sums up by saying: “Crowdfunding or crowdlending gives businesses a great opportunity to grow. SMEs face considerable difficulties in securing loans. The traditional model of lending doesn’t work for all businesses all of the time.”
So, with over £1 billion loaned to small businesses by UK crowdlenders in 2014, will SMEs in 2015 dance to the tune of these platforms? Or will they remain stock still like musical statues?
Andy Moore is Digital Content Manager at LendingCrowd