Comment: A different SME lending path

It’s just a view, but perhaps adverts used to be more memorable than today’s targeted ads that seem to follow us around.

Damon Walford is chief development officer at ThinCats. Picture: contributed.

Even if they no longer hold their water today, they’re endearing and reflect brands how we used to remember them – such as the unnamed bank that “liked to say yes”.

In the banking industry’s defence, if you’re a retail customer looking for a mortgage, credit card or personal loan today, my bet is that any high-street bank would likely welcome your custom. However, if you’re a medium-sized trading business looking for a loan, then I’m afraid the welcome mat is likely to be a thing of the past.

Since the financial crisis in 2009, the business lending market has become fragmented and, for many businesses, restrictive. New capital ratio rules mean banks must hold more money on their books if they’re lending to a business, compared to, say, a home loan, which is why banks would rather do mortgages. Additionally, bank branch closures mean lending decisions are often made remotely, from a central credit hub, by a computer or a person who knows very little about the local economy or the company looking for funding. Captain Mainwaring probably took a redundancy package a few years ago.

Interestingly, we are also seeing a growing lending gap between the types of businesses that banks are willing and unwilling to lend to. Recent research we conducted among small and medium-sized enterprises (SMEs) shows that if you’re a bigger and older business with more tangible assets (vehicles, machinery, premises) then you’re more than likely to go to your traditional bank. However, if you’re a younger business, operating in the modern, knowledge-based service sector for example, you’re more than likely to be among a group that uses alternative lenders. The answer is not simply that banks are bigger and can therefore facilitate bigger loans. The problem is that bank lending decisions are based on which physical assets a business can offer to protect the bank in case something goes wrong with the loan. Banks ignore the cashflow and growth potential of a business. That’s not helpful if you’re a modern SME growing your marketing, or IT business where your main assets are your employees. The lending decision may be rejected because you don’t have sufficient property, machinery or other assets as security, even though you are generating good cash flows.

Our research show that around one-third of businesses stop searching for finance if they’re rejected by their bank. That’s not good for the business – and it’s probably not good for the economy either.

Thankfully, there are more non-bank lending alternatives emerging, but we need to help shift the mindset of the businesses that still feel loyal to the banks that says “no”.

Damon Walford is chief development officer at ThinCats