Banks and small businesses have a historically complicated relationship. Small businesses need financial services and specifically they need loan products. This is especially true when SMBs are in their embryonic phases and good ideas abound but cash flow is limited.
However, a small business in its early phases also represents a troubling risk problem for loan underwriters—whether a business will be successful. Small businesses without a large volume of start-up capital are in a tough spot—though they are 23 million SMBs in the U.S. that are lovingly called “the backbone of American prosperity,” by politicians during stump speeches, they can often find loans hard to secure.
This situation is not unique to the smaller merchants in the U.S., the U.K. and it’s small companies that face similar issues. Yet with problems come promise, and banks are beginning to evolve toward a more welcoming stance toward SMBs. Interestingly though, the strategies for small business engagement do seem somewhat divergent depending on which side of the Atlantic Ocean one is on.
U.K. Pushes For Transparency, Alternative Lending
According to independent external bank reviewer Russell Griggs, the U.K. lending practice to small and medium size businesses has improved, reports the Financial Times.
Riggs oversees the appeals process set up by large banks give customers a vehicle to vent their frustrations on loans that were denied on allegedly unfair grounds. Those appeals have become markedly less successful over time, indicating that banks are doing a better job with their lending practices.
There were 3,518 appeals in the year to March 31, which is up a little over 3,000 from the year before. Successful appeals however, those that are upheld, fell from 1,298 to 1,116. This represents an almost 8 percent drop in the success rate. “My priorities for the coming year will be making sure that the conversation between lenders and SME [small and medium enterprise] customers continues to improve and that awareness of the appeals process increases,” Riggs told the FT. “I aim to ensure all banks can tell their customers clearly and precisely why they were declined for lending and what they might be able to do to change that decision over time.”
While banks are getting clearer and more transparent with SMB customers, they are also moving to give them more options. Earlier this year, the coalition government announced plans to force U.K. banks to direct customers whose loan applications they reject to alternative finance providers—and this includes small business customers. While official recommendations are not out yet, some big banks are getting ahead of the requirements.
For example, Santander bank has partnered with Funding Circle, a peer-to-peer lending website that specializes in corporate loans. Santander customers will now be able to access the P2P lending site directly through a link from the bank’s site.
“Santander’s partnership with Funding Circle is a good example of how traditional and alternative finance can work together to help the nation’s SMEs prosper,” Ana Botin, CEO of Santander UK said, reports the Financial Times. “Peer-to-peer financing is also a useful way to introduce people to the concept of investing in entrepreneurs; an important element in a healthy enterprise economy.”
U.S. Banks Push For More SMB Lending
Meanwhile, on the other side of the pond, large U.S. banks are pushing to invest more heavily in the small business ecosystem. Newest up to the plate is Wells Fargo Bank, which has announced its intention to lend $100 billion — on top of existing loans — by the year 2018 to small businesses across the country.
The project is titled “Wells Fargo Works For Small Businesses,” and will be accompanied by a website and an increased focus on commercial partners.
“Small business is the backbone of our country, and we understand that,” said Sean Mabey, Wells Fargo’s regional small business strategy director in a released statement. “More people are entrepreneurs now than anytime ever, and that is why these folks need help. There are businesses that survived that have never operated in a post-recession economy. And new businesses that have just never operated.”
Recent polling indicates that small business owners’ enthusiasm about their economic prospects has recently recovered to 2007 levels, and that demand for loans from well-qualified lendees has been steadily rising.
Wells Fargo joins Bank of America in a concerted push for small businesses. BofA announced a similar lending push in early January 2014.