Alternative Finances

UK Federation Of Small Businesses Says AltFin Is Just Heating Up

Big Banks To Miss UK's Open Banking Deadline

Small businesses face a mountain of financial challenges in the U.K., from late payments from their large corporate clients to a lack of access to easy, affordable financing. In an attempt to address many of these concerns, regulators have stepped in with initiatives, such as establishing a Small Business Commissioner last year to champion SMB-related causes.

But outside of the government, the financial services market has, in many ways, been working to play its own part in helping small businesses gain access to funding.

The not-for-profit Federation of Small Businesses (FSB) has been a vocal proponent of faster SMB payment times, greater access to more robust banking services and tighter regulation in support of small businesses across the U.K. Most recently, the FSB announced plans to join the alternative finance world and establish the FSB Funding Platform, a marketplace lending portal through which small businesses can access funding from more than 100 lenders.

"Although it's harnessing the latest innovations in tech, it offers a very simple way to access finance, as well as access to human financial advisors," explained FSB London Chair Michael Lassman in a statement earlier this month. "It will transform the business funding market and is a real step [toward] change for small businesses."

Such transformation won't happen overnight, however, and the U.K., with one of the largest alternative finance industries in the world, continues to struggle with bridging small business owners to financing. The FSB's own research on small business finance, outlined in its Q4 FSB Voice of Small Business Index, found that fewer SMBs were concerned about their access to finance in Q4 2017 than they were in the same quarter of 2016. For the first time since Q1 2012, the FSB's credit availability index has surpassed its credit affordability index.

And yet, according to the report, small business confidence fell into negative territory, with 73 percent of SMBs reporting a rise in the cost of doing business. Alternative finance players continue to flood the market, and Dave Stallon, the FSB's commercial and operations director, acknowledged the breadth of alternative funding options for small businesses in the U.K. today.

"The amount of finance sourced from the alternative finance market by SMEs has doubled in the last two years," he recently told PYMNTS. "However, it still remains lower than that sought from traditional lenders.

"Although there are more options out there for small businesses, it can be confusing and overwhelming to know which of these offers the best choice, appropriate package, favorable terms and which are credible," he added.

Research released in 2016 by the British Chambers of Commerce and by Bibby Financial Services found that only 18.8 percent of businesses were familiar with mezzanine financing, a type of alternative funding, while about a third said they were familiar with peer-to-peer funding, trade finance and angel funding. At the time, analysts signaled a weak appetite for funding as the culprit behind this lack of awareness.

As part of the U.K. government's various efforts to improve SMBs' financial positions, officials launched a referral scheme requirement in 2016 that demands traditional lenders link small firms to alternative financiers should they be rejected for a bank loan. With more traditional FIs collaborating with alternative players today, the interconnectivity between traditional and alternative funding has increased.

Stallon noted, though, that throughout these trends, small firms continue to struggle.

"Small business owners are incredibly busy, sales and marketing and operations [are] taking up most time day-to-day," he said. "Seeking new finance is often something that has to fit between those other day-to-day priorities."

It's unclear whether the FSB Funding Platform will move the needle in boosting small business access to funding, or simply be another drop in the bucket of alternative finance choices. Stallon said that the FSB brand is likely to help, as is the FSB's focus on simplicity for the end user.

"The platform offers the user the most simple and least time-consuming application process – and is simplified for specific types of finance: for example, cash flow, equipment, property or working capital," he said.

The FSB's collaboration with the government could help the new platform gain traction, too. The not-for-profit said it is working with the U.K.'s Financial Conduct Authority to roll out the funding platform, adding a boost of regulation and confidence for borrowers.

That could be key as scrutiny builds over some alternative finance players, while analysts eye the increasing practice of loan stacking among marketplace lenders, and as some alternative finance players, once at the top of their game, begin a long, hard fall.

The U.K.'s alternative lending space, however, seems solid. Last month, Reuters reports found that small businesses drove a 43 percent growth in the nation's alt-lending market in 2016.

"It's an exciting time with the emerging alternative finance market and the opportunities this could present for the U.K.'s small businesses," said Stallon.

Here, there are other market forces at work that are fanning the flames of this evolution. Stallon pointed to Open Banking as a key force that will not only help expand small business access to financial services, but could also help to address a key point of friction for small firms that are exploring alternative lending.

"Open Banking should hopefully usher in an era in which assessing the right and affordable financial products will become much easier for smaller businesses," the executive said. "Until now, many of the U.K.'s millions of small business owners have found the process of searching for finance time-consuming and difficult, often resulting in them either being unable to access affordable finance at all, or else taking deals with high interest rates from the big, traditional lenders."



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