Small Business Banking Initiatives Not Enough

British Bankers’ Association’s (BBA’s) Business Finance Taskforce assessed in light of new survey into traditional and alternative funding

Just over a year after the launch of the British Bankers’ Associations’ (BBA’s) Business Finance Taskforce, new research suggests that it has not yet achieved its aim of repairing the relationship between banks and small businesses.

In all, 24% of small business owners on the Forum’s cash flow and finance panel have called for more choice between ‘traditional’ banking services, while 21% want better access to alternative forms of funding.

In total, 26% of respondents said they were seeking out alternative financial products, with 21% of these interested in sourcing them from outside the main high street lenders and just 7% from mainstream banks. 

“The Business Finance Taskforce produced 18 recommendations, some of which have been extremely useful – particularly in the areas of mentoring, lending appeals, finance readiness and funding for high-growth enterprises.”

said the Forum’s Senior Policy Adviser Alex Jackman.

“But the verdict so far is that much more needs to be done to get cost-effective finance to the businesses that need it most.”

“There is falling demand from small firms but that does not mean a lack of need for affordable funding. It reflects just how alienated entrepreneurs are by the restrictive risk criteria and steep costs being imposed by mainstream lenders. As a result, there are increasing signs business owners are looking elsewhere.”

He added:

“Banks must act to boost their small business customers’ confidence by improving regional infrastructures and restoring lending powers to local bank managers, who are in a far better position to judge risk than their centrally-based colleagues.”

“We also need greater competition, both between high street banks and by allowing other, alternative funders to be able to truly compete in finance markets dominated by the banks. These measures would drive up levels of service and bring down costs.”

Mr Jackman discusses the Business Finance Taskforce’s initiatives one year on in the Forum’s blog here.

Preferred Financial Products

Forum members on the cash flow and finance panel were asked to rate a range of financial products and services. Interestingly, with the Government planning to hand venture capitalists a 30% tax break under its Equity Investment Scheme (EIS), 43% of panellists said they would not consider equity finance – and none indicated it as a preferred option.

The Forum believes private lenders should be given similar tax incentives in order to further stimulate small business lending and boost competition.

Traditional overdrafts are most favoured, being championed by 58% of respondents, followed by loans (favoured by 20%). In addition, 20% identified reducing ‘consumption’ in order to control costs as a preferred funding avenue.

While 47% chose credit cards, 24% said they would not use them to fund their businesses. Similarly, 30% of panellists selected leasing or hire purchase but 14% said they would not use this form of finance.

The least popular funding options include micro finance based on credit card receipts, with 48% saying they would not consider this, personal loans or remortgaging (rejected by 47%) and ‘crowdsourced’ funding (41% would not favour this approach). No respondents indicated a preference for any of these products.

Supply chain finance, with suppliers’ consent, was deemed a main preference by just 6% of panellists and was rejected by 29%.

In all, 36% would not consider factoring or invoice discounting but 16% indicated it as a main preference.

Using commercial mortgages was rejected by 24% of panellists but selected as a preferred option by 11%.

Barriers to competition and awareness of alternative funders

In 2010 the Forum provided evidence to the Office of Fair Trading’s review of barriers to entry, expansion and exit in retail banking, which found significant competitive impediments for alternative lenders, particularly in the areas of capital requirements, IT costs, and accessing credit risk information on micro businesses.

The not-for-profit Forum has consistently argued that non-mainstream funders struggle to market themselves in finance markets dominated by the big banks.

However, the latest cash flow and finance panel survey suggests more business owners are now aware of, and considering, alternatives.

Almost all those who would consider alternative financial products already have some form of asset-based finance, including hire purchase agreements (21%), leased equipment or machinery (18%), invoice discounting (9%) and factoring (6%).

Further, 58% of respondents are aware of new entrants to finance markets, mainly building societies and supermarket banks – but supermarkets in particular are more readily dismissed as viable sources of business finance, with 27% saying they would not consider them.

Overall, preferred alternative forms of funding identified by small business panel members were:

  • Overseas banks – which 15% of respondents would ‘strongly consider’ and 9% ‘consider’
  • Private banks offering new services – 9% would strongly consider and 9% consider
  • Specialist banks – 9% strongly consider and 6% consider. However, 15% said they are not aware of specialist banks.

Other funding bodies were viewed more contentiously by panellists:

  • Building societies – 22% would consider using but 14% would not;
  • Reinvestment Trusts or other Community Development Finance Institutions (CDFIs) – 19% would consider but 14% would not;
  • Credit Unions –  6% would strongly consider, 9% consider but 12% would not;
  • Supply chain (with suppliers’ agreement) – 6% strongly consider, 6% consider but 18% would not consider;
  • Supermarket banks – 6% strongly consider, 3% consider but 27% would not consider.

Crowdsourced Funding and Micro Finance

While dismissing it as an existing preference, approximately 1 in 5 businesses were positive about the potential of using crowdsourced funding, suggesting it could offer a good solution to their finance needs – and 1 in 10 want to see how it develops in the next few years.

Not being utilised by any panellists at present, the niche micro finance avenue of raising finance via credit and debit card receipts was treated with some scepticism but there was some support for its potential future use from accountants and businesses in specific industries, such as hotels and restaurants, hairdressers and garden centres.

For these firms, the flexibility of the product and the time to pay back the borrowing was seen a possible benefit.

Financial Advice and Bank Switching

Accountants are business owners’ most trusted sources of financial advice, being selected by 69% of panellists, followed by bank managers (37%), other financial consultants and experts (24%) and other business owners (20%).

According to the Campaign for Community Banking Services (CCBS) some 170 bank branches belonging to leading high street lenders closed in 2010, with that figure expected to be surpassed this year.

In all, 68% of Forum members on the cash flow and finance panel said they would consider switching banks if their local branch disappeared, while 23% said they would not.

The Forum is calling for better banking services and more competition within finance markets as part of its Get Britain Trading campaign.

The campaign aims to raise awareness of the contribution of small firms to the UK’s economy and remove the barriers to starting and growing a business.

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