WEEKLY COMMENT 24-10-2013
By Barry Edwards
A New Concept in Business Funding
Non-bank lending to small and medium sized enterprises (SME’s) has hit a five year high while main bank lending has declined for the fifth year since 2008. The figures highlighted by the National association of Commercial Finance Brokers and the Asset Based Finance Association clearly shows that there is a noticeable shift in the way companies are accessing finance.
The slack in traditional lending to SME’s is being taken up by invoice discounters, asset based lending of all kinds and alternative funders, namely peer-to-peer lenders and crowd funding. It is clear that SME’s have become aware of other sources and are actively engaging in utilising the facilities of these new finance organisations.
It would be fair to say that the sole reason these alternative sources have flourished is the rapid evolution of the Internet and universal access to it. My concern is that as this growth increases it will bring with it a rise in defaults that will damage the reputation of the alternative lending market. The monitoring of the companies that access this kind of funding is still based on management accounts supplied by the borrowers without any checks that the information presented is genuine.
This has always been the case with banks but they take the risk of defaulting as a cost against profit and the depositor is unaffected by any failure. In the case of the alternative lenders, the providers have to accept the risk directly and if these defaulters increase in number it will suffocate the supply of credit. The banks believe this is what will happen and that is why they do not take these new organisations very seriously.
It would be a pity if the alternative finance market disappeared because of the lack of good monitoring which could easily be provided to substantially reduce the failure rate of lending both for them and the banks. There has never been in mainstream lending any attempt to make the decision to lend conditional on an independent monitor being appointed to assist, support and guide the company to achieve the business plan that was originally submitted.
The only time advisors are brought in is when something goes wrong and often by then it is too late to correct the cause of the problem. There is a lot of research into what these problems are and why SME’s fail in large numbers which has never stimulated bankers to devise a method of reducing these failures. In my view the alternative lending market is behaving in the same way and it is only a matter of time before this will badly affect the justification for the concept.
The Business Bank set up by the government has stated that it is aware of this problem and is looking into ways that this monitoring and advice could be implemented but so far nothing has materialised to suggest a solution. Since there is no plan out there at the moment, I would like to put forward a proposal that could solve this problem which was posted on this forum a few weeks ago. It is called Venture Beyond and you can read the complete discussion document if you click on the heading in the right hand column of this page.
Venture Beyond provides a solution to the lending and early stage equity provision requirement but it does not go right to the heart of the fundamental problem that is the cause of the lack of development of business and commerce in the UK and worldwide.
We have in most advanced countries a complete range of methods and forms of the provision of funding which cover all possible requirements that any company would need to grow and succeed in the world. The real problem is that they all independent and do not communicate with each other to make the transfer from one to the other an easy process.
As each company grows it requires different forms of finance from equity to loans of all kinds. There is not one organisation in the world of finance that can provide the full range of funding to satisfy the demands of growing businesses from cradle to stock market flotation and beyond that. In my view, there is a real need for many of the providers of finance to work much more closely together and offer an easy process of funding and advising a growing business through the whole period of development until it can employ the people with the knowledge to fulfil that role.
You have the early stage crowd funding equity providers, lenders of all kinds against specific assets, venture capitalists including business angels and various larger company investors such as private equity and hedge funds. The banks are there to provide the working capital funding, at least, in normal times which supplements all the other forms of finance that are available. Have you ever tried to get these organisations to work together and link their financial provision? It is not an easy thing to do and often they work against each other on purpose. I have never really understood why that is the case since it must be counterproductive.
Therefore, this discussion is saying that groups of these organisations should combine their skills and offer some kind of business crèche to provide a seamless path for businesses to access advice and funding during their growth and development phases. Venture Beyond provides the early stages but it needs to link with the larger providers to complete the cycle to make sure that the process is as smooth as possible for these businesses.
This maybe a bit too creative for the traditional financial services industry but at least the concept makes perfect sense. Let’s hope this idea can be discussed more to see if it penetrates the thinking of the financial world.
That’s all for this week, more observations next week.