Looking for finance for your small business? Don’t assume your local bank is the place to find it. UK government ministers summoned bank bosses to Westminster this week for a crisis meeting on credit availability for small and medium-sized enterprises. They’re concerned that high street banks’ reluctance to lend to SMEs is holding many businesses back – and therefore dampening the UK’s economic growth prospects.
They’ve got a point. The Government points to data suggesting that banks in the UK are saying yes to fewer than 50% of loan applications from SMEs – just seven years ago, the figure was close to 70%. Bank lending to SMEs did increase 13% last year according to UK Finance, the trade body for the banking sector, but nevertheless remained down on pre-pandemic levels.
Still, it’s not all bad news. As the banks have retreated from small business lenders, a rush of new entrants to the finance sector have sought to fill the vacuum. From challenger banks to innovative young fintech start-ups, these organisations are making rapid progress. Alternative lenders now account for around 60% of all loans to UK SMEs; in 2008, the figure was 10%.
In the challenger bank category, mergers such as the deals between Coventry Building Society and Co-op Bank, and Virgin Money and Nationwide Building Society are creating larger players. Plus you can add the likes of technology-enabled Revolut, Monzo, Starling Bank and Atom Bank to the mix.
Meanwhile, Juice is one good example of the new breed of fintech lenders. Launched in 2019, it specialises in providing finance to ecommerce businesses, offering revolving credit facilities that enable such firms to borrow in order to increase their stock while managing the natural cycle of goods-in and goods-out.
Juice’s technology enables it to plug directly into SMEs’ own systems to access their data on sales and marketing, as well as their financial performance. The lender’s algorithms then analyse that data to assess whether an SME represents a good credit risk, how much it should lend, and at what price.
“Many small businesses come to us after growing frustrated with the long and complex process of getting a very simple business loan from conventional banks,” says Katherine Chan, the founder and CEO of Juice. “We can give them an answer much more quickly and often lend much more, simply because we have access to the data.”
Juice expects to have a loan book worth $133 million (£100 million) by 2028, boosted by new support from investors including Aern Capital and Falco Capital, and underpinned by a credit line from Paragon Bank. Announced this week, the deal provides Juice with an additional $33 million (£25 million) of funding from which to make loans to UK SMEs.
“We’ve already helped more than 100 companies in the UK,” adds Chan. “Many of them come to us after being rejected by their own high street bank, but their data shows us their sales and marketing returns are really strong.”
It’s a similar model to the approach taken by GoCardless, which works with fintech Pipe to use transaction data in order to assess whether small businesses are a good bet for credit. Using the payments data it collects routinely through its operations on behalf of businesses, it is able to offer pre-approved credit facilities to firms, “The potential market here is off the charts,” Pipe CEO Luke Voiles told me when I spoke to him late last year. “It’s a super-friendly product for small enterprises, requiring no personal guarantees or credit score.”
Such models are linked to the wider open banking movement in the UK that is driving new opportunities for SMEs to secure credit. In 2018, UK regulators introduced new rules requiring the UK’s big banks to share customers’ transaction data with fintechs and other trusted third parties – with those customers’ permission, of course.
Using APIs – connections to banks that automatically provide access to their data – this enables a growing number of new entrants to SME lending to source the business transaction data of customers applying for loans. The links give them real-time data they can use for credit analysis. That enables them to make much faster decisions about loans – and to provide funding much more quickly; SMEs should receive lending decisions within days and cash within hours.
Allica Bank is one fast-growing player in this arena. Its latest initiative, announced this month, is a partnership with open banking platform Yapily, which enables small business customers to top up current and savings accounts more quickly. “Being able to easily and quickly top up your account, rather than faffing around with manual payments, is one great example of [how modern technology gives small businesses new options],” says Nida Sattar, product director at Allica. “And using open banking in this way provides important security benefits for our customers too.”
Elsewhere, iwoca is another innovative small business lender attracting significant interest. Founded in the UK, the business started out by funding ebay-based ecommerce operations, and recently announced it had raised $109 million (€100 million) to expand further in Germany. “People come to us because our services are much better than conventional banks,” says iwoca CEO Christoph Rieche.
The bottom line? There’s no doubt that the mainstream banks in the UK have pulled back from support for small businesses. But a growing number of nimbler and more imaginative players are stepping into the breach. And for many firms, even if they could get bank finance, these firms could be a better fit.
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