Finance Monthly September 2019 Edition

19 www.finance-monthly.com FINANCE & BUSINESS - TRADITIONAL BANKING IS FAILING UK SMES Banks aren’t playing ball Traditionally the UK’s banks have been seen as the ‘one-stop-shop’ for SMEs looking to borrow money for investment. Yet they are not playing ball. The financial crisis of 2007–2008 revealed substantial weaknesses in the banking system, the effects of which continue to weigh heavily on the UK’s economic growth and financial stability. Consequently, SMEs are being starved of funding and forced to jump through hoops in order to access vital cash, because the big high street banks are wholly focussed on de-risking their balance sheets and shoring up capital. The inescapable fact is that banks aren’t lending to SMEs because it’s not profitable for them to do so. Under Basel III, the global regime under which banks are regulated, banks are obliged to hold almost twice as much capital against an SME loan as they are for, say, a buy-to-let mortgage. Reserving more capital means making less profit – unsurprisingly therefore, banks naturally migrate towards activities that deliver more to the bottom line, to the detriment of SMEs desperately in need of business liquidity. If SMEs can no one longer rely on traditional bank loans for finance, it begs the question as to who can support frustrated business owners in the tough times ahead. Alternative finance providers pick up the slack Fortunately, alternative financial services providers are picking up the slack left by traditional financial institutions, by creating innovative ways for SMEs to access funding via a myriad of means such as peer-to-peer lending, crowdfunding and venture capital. For example, Hunter Jones has been successfully raising development finance for SME property developers via ‘Property Bonds’. Investors’ capital is offered as a loan to a development company and their contract clearly explains how the investment will be used, how the capital will be secured, and when the investment will be repaid. Our work means that many construction projects in the early stages of development are being ‘green-lit’ and prospering. In return, investors are receiving a highly competitive fixed return on their investment with the benefit of ‘bricks and mortar’ security. The uptake has been extraordinary and we have seen £50 million raised for UK developers in a five-year period, with expectations to raise a further £25 million in 2019 alone. The future of SME finance If SMEs are to improve their outcomes and thrive, more will need to be done by the Government and the financial services industry to tackle the lack of innovation in SME lending and the grip of the banking oligopoly that dominates it. But changing the mindset of SMEs regarding the importance of borrowing to invest is also of vital importance – particularly in ensuring there is accurate understanding as to the meaning and benefit of ‘alternative finance’. It has recently been announced that the Chancellor has set aside £138 million to boost public communications and help people and businesses get ready to leave the European Union on 31st October. My fingers are firmly crossed that part of that money has been allocated to educate SMEs as to the importance of alternative lenders as a source of finance, and a viable means to empower UK plc in the tough times ahead. If not, ‘investment’ will become a dirty word and the financial services status quo, and its associated problems, will continue unabated – a situation that none of us, least of all our SMEs, can afford. “ “ It has recently been announced that the Chancellor has set aside £138 million to boost public communications and help people and businesses get ready to leave the European Union on 31st October.