SME lending is a hot topic. Financial struggles triggered by coronavirus have highlighted how difficult it is for small businesses to secure mainstream bank loans.A major part of this challenge is the amount that SMEs want to borrow.The average SME business loan is around £97,000, which is a relatively small amount when compared to the funds being borrowed by major corporate enterprises. To address this niche in the market, many alternative finance platforms have begun providing ‘micro loans’ (under £100,000) to small businesses. But while this meets the needs of start-up SMEs, scale-up companies often need to borrow more – what can they do when their requirements exceed the maximum threshold?
Story vs statistics
Over the past 10 years, we’ve seen a diverging trend in the finance industry. While personal lending has increased, small business lending has fallen to less than 20% of its original level. This decline is being driven by a growing reluctance among SMEs to apply for external finance – but why?On the surface, small business lending seems fine; UK Finance data shows that 8 in 10SME loan applications are approved. But this statistic doesn’t include companies that are ‘qualified out’ before the formal application process begins, or who are put off applying as their chosen lender won’t offer affordable or manageable terms. The challenge for start-up and scale-up companies is that mainstream bank lending criteria is both stringent and inflexible, due to governance requirements. This creates a homogenous approach to large portfolios, with limited ability for individual discretion – so if businesses don’t meet the exact guidelines, there’s little point applying.There are two main reasons that SMEs struggle to access business finance compared to larger enterprises. The first is that they are naturally higher risk loan candidates. Small businesses tend to have been in operation for less time than big corporations, so they may not have a sufficient audit trail to build up a strong credit rating. Additionally, most bank loans require some form of security, and SMEsoften don’t have collateral to secure against a loan.Secondly, the relatively small amount SMEs want to borrow means the risk outweighs the reward in the bank’s eyes. As we’ve already mentioned, the sub-£100,000 ‘micro loan’ opportunity appeals to many small businesses, but banks find lending this amount less attractive,especially when they look at loan servicing costs versus income and returns on capital. As a result, many SMEs turnto alternative finance providers to borrow money, who specialise in the microloan market. In 2020, the average SME will borrow around $121,000 (equivalent to £97,000), even before taking into account additional requirements for post-coronavirus economic support. What happens when that average figure tips over the £100,000 threshold? Or when companies require further, more substantial funding to scale-up their business?
Closing the funding gap
SMEs that need more capital than a microloan can offer are becoming trapped in a ‘funding gap’, where their borrowing needs are too great for most microloan providers, but their credentials do not meet the terms for mainstream bank lending.Thankfully, alternative lending platforms are being developed that directly address this issue – including the new WeOwnpeer-to-peer (P2P) lending marketplace.Rather than targeting the already buoyant microloan segment, WeOwn is focussed on supporting under-serviced SMEs who want to borrow £100,000–£1m, but who either don’t want to apply for,or don’t qualify for, an asset backed loan.Our business model is ideally suited to scale-up SMEs who need more substantial funding to accelerate their growth or reach the next business milestone, but who want an easier process, lower interest rate and better experience than bank borrowing can offer.
Enabling flexibility in the loan market
Rather than forcing small businesses to adhere to strict criteria, WeOwn is focussed on engagingprofessional private investors with their own budgets and agendas. This fresh approach attracts investors who see the opportunity in lending larger sums to SMEs, and who also understand that – with an open mindand a clear strategy around sectors of the economy – therewards tend to outweigh the risk.Instead of setting standardised lending terms, the WeOwn marketplace enables investors to operate at their own discretion. Lenders can choose which businesses they back, how much they are willing to offer, and the interest rate and terms of repayment.By adopting this model, investors define the level of risk they are willing to assume, and SMEs can obtain a business loan on realistically achievable payback terms. WeOwn is the interface between the two, ensuring the application and matching process, transfer of funds and ongoing communicationisas seamless as possible. In our model, SMEs ask for the support they actually need, and lenders make individual decisions to support those requirements.
An opportunity for everyone
It’s not easy for SMEs to secure business finance, and many promisingbusinesses hit a growth ceilingbecause they can’t get substantial enough funding to take their business to the next level.While the European microloan market is well serviced by alternative finance providers, WeOwn is taking a different stance – focussing on the chronically under-supported scale-up segment who need larger business loans. We are working with investors who understand the opportunities of lending more substantial sums to high-growth companies, and who want to use our digital lending platform to rapidly build relationships. With WeOwn’s choice-driven, no fuss approach, all parties can connect with likeminded entrepreneurs, and hopefully make profitable progress. WeOwn’s P2P lending platform is launching soon. Pre-register for a business account or pre-register for an investor account.