Post on 14-Aug-2015
The rise of the debt-shy SME: Why business borrowing is broken – and how to fix it
Verus360’s TIM EVANS explores the phenomenon of the permanently non-borrowing business, and looks to a fairer future for SME finance.
© Verus360 May 2015 | www.verus360.com
The ‘funding gap’ for UK businesses is well documented. However, there is evidence that risk-averse lending strategies by the big banks have created a new breed of ‘debt-shy’ SMEs who are permanent non-borrowers.
@Verus_Tim
© Verus360 May 2015 | www.verus360.com2
Contents
1. The problem for SMEs 3
2. The challenge for traditional lenders 5
3. The tech-enabled customer 8
4. The business solution 10
5. What’s next for business finance? 15
6. Introducing Verus360 18
© Verus360 May 2015 | www.verus360.com3
The British Business Bank’s recent report,
The Business Finance Guide – a journey from
start-up to growth, estimates the finance gap for
small firms to be a modest £1bn a year. The Breedon
Report, published by a government committee
led by former Legal & General boss Tim Breedon,
actually suggested a gap of up to £190bn by 2017.
The Treasury Select Committee’s recent report on
Conduct and Competition in SME Lending revealed
that bank loans to business plummeted by £800m
in the final quarter of 2014, as well as highlighting a
lack of choice and poor treatment of customers.
The findings also pointed to providers' inability to
justify excessive and often vague fees. This was
reiterated in a recent Market Invoice report, which
revealed that British businesses were stung to the
tune of £425m in hidden costs last year.
Commercially responsible lending is essential
for the UK economy to continue to grow
post-2008. Yet, seven years on from the UK’s
deepest recession since World War II, and many
small-to-medium-sized businesses (SMEs) are
still feeling the pinch.
SMEs clearly need access to funding to expand
or improve their businesses – but the fact is that
they’re still finding it difficult to borrow. Despite
occasional signs of an upturn, banks are still not
lending on a scale that meets demand.
1. The problem for SMEs
© Verus360 May 2015 | www.verus360.com4
The lack of comparable data around the true cost
of business finance can be confusing for customers.
Independent research conducted by Future Thinking
for Verus360 in 2014 shows that 40% of UK SMEs don’t
even know how much they’re paying for finance, while
60% say they're not easily able to compare finance
costs between lenders.
Access to finance is often further hindered by
bureaucratic, lengthy and prohibitive loan application
processes, as well as outmoded thinking, lo-tech
systems and a lack of truly customer-focused solutions.
Combine this with an industry-wide lack of transparency
around pricing and confusion over alternative financing
options, and it’s understandable why businesses can’t
easily access funding – essential for survival and growth.
It also starts to explain why some businesses are turning
their back on using finance altogether – with an impact
on their business growth potential and, arguably, the
broader UK economy.
All of this has helped to create a ‘debt-shy culture’
among high-growth SMEs, along with a reluctance to
borrow for their business.
Last year a British Banking Association report highlighted
that 48% of SMEs were ‘permanent non-borrowers’,
who did not want or plan to use external finance in the
future. And earlier this year, Phil Orford, Chief Executive
of the Forum of Private Business, pointed out that there
was still a subdued appetite for lending among SMEs.
I don’t know how much I’m paying
for finance
I can't easily compare lenders
and costs
40% 60%
© Verus360 May 2015 | www.verus360.com5
While finance provision remains low, many SMEs are
reluctant to apply for funding in the first place. This is
The Chairman of the Treasury Committee, Andrew Tyrie,
recently confirmed that SMEs remain wary of asking
banks for loans, or even for advice, admitting that:
"Confidence has been badly shaken, and that needs to
be re-built. That’s a big job, and it’s not going to be done
in a year or two. It’s a job that will need to take place
over many years."
2. The challenge for traditional lenders
The main institutional lenders seem unable to
respond to the funding gap, and therefore play
their part in closing it. There needs to be a greater
alignment of products and services with client
needs, while also acknowledging the changing
nature of SMEs and re-establishing customer
confidence.
Confidence has been badly shaken, and that needs to be re-built. That’s a big job, and it’s not going to be done in a year or two. It’s a job that will need to take place over many years.
© Verus360 May 2015 | www.verus360.com6
So how do major lenders go about rebuilding customer
confidence, re-gaining trust and changing behaviours to
encourage borrowing and further economic growth?
There are multiple issues they need to address:
1 . R E S T R I C T I O N S O N L E N D I N G
Post-2008, there has been an increased focus on capital
adequacy, with banks needing to manage risks more
closely to ensure they’re able to withstand future crises.
This has created more restrictive lending policies, and
tighter underwriting to which lenders have to adhere
– which in turn means fewer SMEs getting the funding
they need, whether it be first-time loans or corporate
overdrafts. According to the Treasury Select Committee,
SMEs have also underestimated their chances of
securing bank finance by between 7 and 16%.
2 . R I S K - C E N T R I C C U LT U R E
The industry has to accept that customers are good,
honest business people, looking to make a success
of their lives. This will mean moving away from a ‘risk
above everything’ culture, where lenders’ response to
the prospect of customers defaulting is to increase the
cost of credit.
3 . T H E V A L U E O F F E R E D
Financial institutions have to think about why they’re
in business, and what it means for them to offer best
total value. Of course, lenders need to make money,
manage risks and generate shareholder dividends, but
that’s only part of the picture. What about solving the
problems that customers may have in making a success
of their businesses? There is arguably a greater social
part here for lenders to play.
© Verus360 May 2015 | www.verus360.com7
4 . E N G R A I N E D I N F L E X I B I L I T Y
It’s no longer acceptable to attempt a ‘one size fits all’
approach to products and services. Lenders need to be
more flexible and re-think what they offer to customers.
This means considering how their propositions fit in
with clients’ businesses as a whole – including other
products, services and processes they may be using.
5 . O U T D A T E D B U S I N E S S M O D E L S
The industry has to shake off outmoded mindsets and
embrace a customer-led culture. This may be a big ask
for the established and traditional financial services
institutions. They have massive legacy infrastructures
to contend with – the technology and systems, plus
ingrained policies, processes and internal reward
systems where targets are linked to employee pay.
The legacy operating models of these Goliaths are not
designed to be changed quickly, and can perpetuate a
culture that’s anything but customer-led. That’s not to say
there aren’t great people working in these institutions
who want to make a difference, but it’s about enabling
them to do so.
6 . L A C K O F C U S T O M E R F O C U S
Since the financial crisis, we’re still seeing the after-
effects of inappropriate lending decisions, and a lack of
funding options that are truly customer-focused.
If lenders start with concern for their customers at the
very heart of their thinking, they can create ‘customer
first’ finance products that are set at a commercially
responsible price. That way, they can provide real value,
and treat the customer fairly – while acknowledging that
their customer base is also changing.
© Verus360 May 2015 | www.verus360.com8
The ways in which SMEs are undertaking
transactions and connecting their businesses
together are evolving, thanks to a seismic shift
in how technology is used to enable business.
3. The tech-enabled customer
An explosion of tech-enabled finance is removing barriers...
...product development is no longer the sole domain of the banks.
© Verus360 May 2015 | www.verus360.com9
Customer Relationship Management (CRM) by businesses
is increasingly shifting towards social media to engage
with customers, with businesses building accessible
LinkedIn-style networks that foster a more open market
and encourage real-time collaboration. Greater numbers
of transactions are processed using cloud-based
technologies, as businesses become comfortable with
connecting and extending their processes online via
innovative, customer-friendly apps.
SMEs now have greater choice and control over
products and services, in terms of both business finance
and the financial technologies (‘FinTech’) that support
business operations. This explosion of tech-enabled
finance has come about because it’s easier, cheaper
and quicker for lenders to build applications using today’s
technology – removing barriers that once made financial
product development the sole domain of the banks.
The number and sophistication of services online is
growing daily, giving customers greater access to niche
products that may better suit their specific needs. In
turn, as it becomes easier to find new products, services
and recommendations, further market opportunities are
created for lenders, meaning more product choice. It’s the
classic ‘long tail’ effect, as described by Chris Anderson
in his best-selling book The Longer Long Tail: How
Endless Choice is Creating Unlimited Demand.
All of this is great news for SMEs in terms of accessing
finance. It means they can sidestep the continued
challenges of borrowing from traditional lenders and no
longer have to rely on ‘one size fits all’ offers. It’s also
providing opportunities for a new, alternative breed of
business funders.
© Verus360 May 2015 | www.verus360.com10
4. The business solution
T H E R I S E O F A LT E R N A T I V E F I N A N C E
As the banks struggle to serve SMEs, we’re
seeing a boom in alternative finance – a broad
term taking in a potentially bewildering range of
non-traditional funding options...
● corporate venturing
● asset-based lending
● venture capital
● private equity
● crowd funding
● peer-to-peer lending
● supply chain finance
● self-issue retail bonds
● business growth funds
● pension-led funding
● business angels
● invoice trading
● public equity
● retail bond markets
© Verus360 May 2015 | www.verus360.com11
The Independent innovation charity NESTA
released its own survey of the alternative
finance market in 2014. Its Alternative Finance
Industry Report highlights that the value of the
UK market more than doubled year on year
from 2012 onwards, while estimating that,
in 2014, SMEs accessed £1.74bn in funding
through various alternative finance models.
Customer concerns around the robustness
of non-traditional lenders are disappearing.
Alternative finance routes are fast becoming
the new ‘normal’ for SMEs to access funding,
with a recent survey by the UK Bond Network
finding that more than two-thirds (68%) of
UK SMEs would now consider alternative
finance as a way to raise capital.
68%
I might use alternative financing
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There are four key factors contributing to this surge:
1 . A C C E S S I B I L I T Y
Ease of access is fundamental to the success of
alternative finance, as discouraging barriers around
onerous paper-based application processes are
removed. Thanks to technology, getting funding online
is becoming simpler and speedier than traditional
forms of funding – meaning fewer SMEs missing out on
time-sensitive business opportunities.
2 . F L E X I B I L I T Y
The sheer variety of options available means borrowers
can mix and match providers, products and services,
customising the products to their particular needs and
to meet different events in their business lifecycle.
3 . I N C R E A S E D C U S T O M E R F O C U S
The culture of alternative finance, including the more
disruptive FinTech industry, is less risk-obsessed, and
open to greater collaboration with its customer base,
creating products and services that are more customer-
led than those offered by the traditional lenders.
4 . I M P R O V I N G P R I C I N G
Pricing is becoming more competitive as increased use
of technology reduces operating costs – so the cost
to businesses can be lower than the overall cost from
more traditional forms of funding. That said, SMEs must
establish the full cost of the finance, not just the headline
rate. Pricing is still not transparent enough.
All of this results in better products, a greater fit to need, and improved access to finance, supporting the growth of
UK business and helping to optimise working capital needs. Alternative finance is by no means a mature business
environment, however, and this emergent form of funding still comes with caveats.
© Verus360 May 2015 | www.verus360.com13
For example, one UK business loan company offered a
headline rate of 2.1% for a 10-week business loan. Closer
examination of the offer revealed that even a low-risk
‘five-star’ rated company which repaid the loan in 10
weeks would pay an APR of 11.4%. A higher-risk ‘one-star’
rated company would pay 14.4% over the same period,
translating into an APR of 101.3%.
The lure of the headline rate
As with traditional forms of finance, the
temptation to be drawn in by initially attractive
headline rates remains an issue for businesses.
While the true innovators in this space try to
make pricing simple and transparent (compared
to the maze of hidden fees, unexpected
charges and ambiguous extra costs levied by
many of the institutional lenders), customers
have to look beyond the headline rate and
make sure they’re aware of exactly what they’re
paying for. HEADLINE RATE
14.4%
ENDING APR
101.3%
© Verus360 May 2015 | www.verus360.com14
42%
I didn't know about all of
these options
Finding the right product
Alternative finance is a noisy sector. While the
choice of finance products is increasing, the
breadth of options can be confusing.
NESTA’s report found that 42% of businesses
with an annual turnover of less than £1.1.m
weren’t fully aware of the options available.
Knowing where to find the right providers is
important. Some forms of alternative finance
come with restrictions, while others are
sector-specific, so businesses can find it hard to
understand which products and services are
right for them. The key consideration for SMEs is
to do their homework before committing.
© Verus360 May 2015 | www.verus360.com15
We’re currently at a tipping point in the UK
regarding the way that businesses access
finance, and although this has brought about
much in the way of positive progress, further
change is needed.
M O R E I N F O R M A T I O N O N A LT E R N A T I V E F I N A N C E
As the lending landscape evolves, the new kids
on the block must provide SMEs with clearer
directions on how and where they can access
alternative forms of finance, as well as what the
different options are.
5. What’s next for business finance?
Things are improving as customer awareness rises, but
more effective signposting is still required.
Conrad Ford, Chief Executive of Funding Options, an
online 'one stop shop' for alternative business finance,
points out: "Not all firms fit traditional bank lending, and
for most of the hundreds of thousands rejected each
year there are other finance options if they only know
where to look."
“Sadly, most of these businesses will give up after the
first hurdle – leading to lost growth and employment
opportunities across the UK. It's incredibly encouraging
to see a growing focus on helping firms to navigate
the often complex and confusing world of alternative
business finance, most notably through the government's
new mandatory bank referral scheme."
There are other finance options, if only businesses know where to look.
© Verus360 May 2015 | www.verus360.com16
R E F E R R A L S F R O M B A N K S
While banks continue to turn down potential customers
for funding, they should be more willing to refer those
businesses on to alternative finance lenders. Such
partnering is already happening to an extent (between
Santander and Funding Circle, for example). That said,
it will be interesting to see the shape of the industry –
and which business sectors are channelled en masse to
alternative finance providers by the 'big four' UK banks
in the following months, now that this has been made
mandatory as part of the Small Business, Enterprise &
Employment Bill.
A D A T A - S H A R I N G C U LT U R E
A different mindset will also be required of SMEs
themselves, to embrace an open data-exchange culture
between themselves and lenders. The majority of the
new, technology-driven funding services are enabled by
information, and require good data from the customer.
To get the best out of alternative finance, plus other
FinTech-style products and services, SMEs should not
underestimate the importance of having high quality
data (including indepth accounts, transaction data and
customer details), as well as its ongoing management.
So, in the same way as in the consumer world we are all
heading towards the idea of the quantified self – using
the personal data gathered by wearable and mobile
apps to improve our lifestyle – the same will happen
with financial data. Businesses will quickly aggregate
all the different information about their performance,
their customers and their competitors, giving rise to the
‘quantified business’.
A different mindset is required – from both banks and SMEs.
© Verus360 May 2015 | www.verus360.com17
The insights this data produces will enable SMEs to
become more agile in their performance, and more
competitive.
In essence, the future of business finance is a positive
one. A shift away from the restrictions of the institutional
lenders, combined with an explosion of new opportunity
offered by technological advance, has enabled a more
diverse market that’s easier and faster to access, as well
as being more competitive.
What’s needed now are solutions that address the
problems with traditional lenders and embrace the
positives of alternative finance (such as its flexibility and
availability). At the same time, they need to address the
continuing issues around transparency of pricing – as
well as providing information, choice, and best value for
the customer.
Only then will we see the next great leap forward in what
can be achieved within the lending landscape. Whether
this changes the ‘permanent non-borrower’ attitudes
and behaviours remains to be seen.
But what's certain is that, in order to succeed, this
cultural shift needs to be put in place by people who
are passionate about doing the right thing – and in the
right way.
And that's where we come in...
© Verus360 May 2015 | www.verus360.com18
Verus360 is a brand new business, dedicated to
providing fair finance for SMEs. Many businesses
sometimes feel that their finance arrangements
are in control of their business, rather than the
other way round.
We’re here to change that, with an innovative
online business finance facility that’s easy to
use, fairly priced and puts you in control.
6. Introducing Verus360
Our vision is quite simple – to reinvent business
finance
How does it work? We’re offering a flexible business
loan (similar to a secured overdraft), based on a full
understanding of your business profile. Delivered totally
online, at your convenience.
Instead of borrowing a set amount of money over a fixed
period, we provide a facility up to an agreed limit. You
choose how much you want to use each month, and
we charge on that usage alone. There are no minimum
fees, no service charges, and no hidden costs. If you
don’t use the facility, you don’t pay a penny. What’s
more, we don’t ask for personal guarantees, and there
is no assignment of personal property.
Our vision is quite simple: to reinvent business finance.
We’ve created something we believe can revolutionise
the market. Join us as we change the face of the business
finance landscape.
Tim Evans
S T R A T E G Y, I N N O V A T I O N & B R A N D D I R E C T O R F O R V E R U S 3 6 0
@Verus_Tim
Tim leads Verus360’s thinking on how we bring
value to our customers in a digital world.
With nearly 20 years’ experience in SME finance,
he ensures the customer voice is heard and that
we continue to break new ground in search of the
perfect customer experience.
19
Get in touch
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Registered in England and Wales (co. no. 08812878).
Registered office: 105 Duke Street, Liverpool, L1 5JQ, United Kingdom.
© 2015 Verus360 Limited
info@verus360.com
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www.verus360.com
@Verus360
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Verus360 is a UK-based business dedicated to delivering
innovative online business finance products and services to
small-to-medium-sized businesses (SMEs).