In the years since the Great Recession, it would be an understatement to describe the SMB lending situation in the United States as difficult. While credit markets retreated full stop in the wake of the meltdown for almost all but the most extremely creditworthy - larger businesses and individual consumers saw the market loosen. SMBs, on the other hand, haven’t fared so well, fueling the rapid growth of the alternative lending space in the U.S. - particularly for small businesses.
But travel across the pond to the U.K., and difficult does not even begin to fully describe the SME lending experience over the last seven years.
Dire might be a better choice of words.
Revenue requirements were more sharply raised. Credit standards were squeezed almost shut. Capital requirements to underwrite loans to small business shot up - as did the wait times for businesses awaiting access to working capital. According to reports, first-time small business loan applicants were rejected by major banks 50 percent of the time. Less than 2 percent of those rejected appeal the decision; only 1.3 percent of those that do appeal get money.
So, you say, the financial crisis is in our rearview mirrors and things are perhaps getting better. Or perhaps not. According to a recent survey by The Federation of Small Businesses – a small business lobbying group - 22 percent of small businesses reported the costs of financing are a barrier to growth, up from only 10 percent the year before. And those costs can be measured in real money - but also in time, as the process of securing a loan for a small business can easily outstrip a merchant's ability to wait - particularly merchants facing cash flow problems due to lumpy receivables payments.
“I think there are a number of factors – the financial crisis was possibly one of the leading drivers. But I think in general, the traditional lending market [in the U.K.] uses archaic systems and processes, and we all recognized the huge opportunity to disrupt there,” Russell Gould - Chief Operating Officer at Everline and ezbob - told MPD Karen Webster in a recent podcast. “Their processes take anywhere from 4-8 weeks, and we’re now doing it in less than 60 minutes. And we still think that’s too slow, so the opportunity [to improve] is still there.”
Ezbob is the trading name of Orange Money - and offers an automated lending platform that quickly guides potential small business borrowers through an automated and paper-free online lending platform. The platform leverages proprietary credit assessment algorythms to assess risk in real time, which allows ezbob to offer a decision to business in real time.
“We are the biggest business e-lender in the U.K. at the present time, and we’re growing by over 100 percent each year since we started in 2012,” Gould explained. “We basically take all small businesses that have been operating for 12 months, as we use their historic, real-time data to make decisions. In the U.K., there are really three types of businesses: limited companies, limited liability partnerships, and sole traders. We support all three of those.”
And they support them quickly - as the automation nearly eliminates the friction. But of course offering an answer faster is only good if the answer itself is good and money is going out to the right borrower- leading Webster to inquire what the backend process looks like to make those fast answers possible.
“We connected to the eCommerce sites like Amazon, eBay, and Alibaba, and we connected to cloud-based accounting solutions in the U.K., and then we connected to the banks’ transactional data. We’re using that as well as typical credit agency data to inform ourselves on the business' performance, and make a real-time instant decision, which is also self-learning,” Gould noted.
Moreover - the U.K. SMB market in its eight-year transition from difficult to dire for small businesses has altered the shape of the typical alternative borrower. Whereas U.S. firms are often working with thin credit files or damaged credit histories that do not function well within traditional risk algorithms - the pressures in the U.K. market has pushed even very “mainstream” firms into the alternative market.
“We don’t operate in the subprime market – we’re very mainstream. All of the businesses we lend to have or can get funding from banks, they just choose to use because we’re more convenient," Gould told Webster. “And if there are maybe 2-5 directors in a small business, and one or two of them have to spend a week preparing documentation, that’s a lot of work compared to what it takes with us – a matter of minutes. That amount of savings is worth a lot to an SME.”
And yet ezbob does not want to keep its innovation all to itself - and like its U.S. counterparts is looking to, as Webster said, form “partnerships between banks and the online lending players who are starting to find ways to work together and complement the capabilities that the lenders provide with distribution that traditional financial services companies provide.”
“We’ve structured our business in a way that there are three parts to it – one is the core lending part that’s all about supporting SMEs, one is about the platform and technology itself, and one is about the data we get from the businesses that we use to help them,” Gould told Webster when he described the evolution away from bank competition toward collaboration that is going on in the U.K. “On the platform side, we’ve built a structure, process and integration that allows us to make effective, lost-cost decisions. In the banking world, it would take around £2,500 in costs to underwrite the loan, and we’re able to do that for a fraction of the cost. From a lender’s perspective, we are attractive because we’d allow them to underwrite at a lower cost and make those loans that are currently unprofitable, profitable.”
Because while alternative lenders are becoming more popular, the reality is the vast majority of lending in the U.K. is still going through traditional channels. According to reports in the Financial Times, traditional bank lending accounted for about 75 percent of the total funding for small and medium businesses in 2014 – a reality that Gould confirmed.
“In the UK in particular, there are five banks that provide 90 percent of the business funding. The alternative sector is very much at its infancy, and I think as more small businesses become aware of the products and services we offer, the more people will switch.”
And, it seems, that the British government gets its way - that alternate lending sector’s infancy will be short - as regulators are increasingly interested in pushing formal collaboration between alternative lenders and traditional banks with the end of getting more money into the hands of Britain's strapped small businesses.
The head of the British Business Bank has announced plans to enact a new program by 2016 to facilitate traditional lenders and big banks in referring small businesses that have been rejected for a loan to alternative financing options. And while it is a plan that has been lauded by some - others in the alternative lending community have complained the legislation does not go quite far enough. Banks will only be required to refer customers after assessing them unworthy of credit - but many in the industry have pointed out that if business have to go through the entire lengthy and paperwork intensive process of applying through a bank before they get referred to an alternate lender - the main benefit of alternate lenders (avoiding that process) is lost.
And, as it turns out ezbob is not ready to wait, and instead plans to forge ahead - strengthened by its latest acquisition, Everline.
“Everline and ezbob joined [forces] in February, so our primary goal at the moment is to merge those two businesses together so we have one operating platform and one structure. The next two or three months will be about getting the foundations right, and creating that strong base we can work off of. Then, it will be very much about growth, amplifying what we do and reaching more SMEs,” Gould noted. “Naturally, we’ll also talking to a lot of traditional providers about our platform and how we could support them. We’ve also done a deal with Alibaba where we provide trade finance to U.K.-based small businesses buying a product through the Alibaba website. And we’re talking to a number of providers about those type of arrangements, which we think will be very exciting for us going forward.”
Because, as Gould noted, the market in the U.K. has to start moving forward for small businesses - as sitting in neutral is not good for either lenders or businesses. For ezbob’s money - the way forward is with faster, more automated and a more streamlined process.
But perhaps by getting more businesses that by any sensible calculation of risk should be extended credit into the marketplace they might just help give it the kick it needs to get out of neutral and into first gear.