Capital investment by small and medium-sized enterprises (SMEs) remains well below levels prior to the credit crunch. Access to finance is the recurrent complaint, with mainstream banks tagged as the source of this lassitude.
The latest data from the SME Finance Monitor shows that just a third of the UK’s small businesses turned to their banks for financing in the first quarter of this year – the lowest level on record. Almost half are now classed as “permanent non-borrowers”, shunning all forms of external finance.
There have been efforts to cure this malaise. Launched in the summer of 2012, the government’s Funding for Lending Scheme (FLS) was meant to help banks release loans more cheaply. This included both business lending and mortgage loans, but the latter was scrapped at the end of last year.
Despite that recalibration, net lending to SMEs fell by £723 million in the first quarter of this year.
The government-backed British Business Bank (BBB), also launched in 2012, appears to have fared better. It lent nearly £800m to more than 30,000 SMEs in its latest financial year. That, however, is less than 1 per cent of the estimated five million SMEs employing some 25 million people across the UK. Welcome relief for those that can get it, but a panacea it isn’t.
Part of the problem with the BBB is its set-up. It relies heavily on business angels and venture capitalists who want a chunk of equity – and more often than not a seat on the board – of the business they are funding. That’s pretty extreme for an SME that is simply seeking investment to buy additional stock or purchase new equipment.
So despite these and a raft of other government initiatives, the private sector is ramping up its own range of financial alternatives. Peer-to-peer lending, online search tools and asset finance have all taken off in a big way.
PayPal is the latest to join the bandwagon, announcing last week that it will begin offering “faster, fairer” cash to its small business customers across the UK.
It follows last year’s launch of PayPal Working Capital in the United States, where small business users can apply for a cash advance based on a percentage of their transactions through the online payment service. The advance is repaid from a share of their daily PayPal sales.
The programme has obvious limits, as only SMEs conducting online business through PayPal get access to a loan. Although the charges will likely be reasonable for an emergency stop-gap, it won’t be the most affordable of financing in the long term.
But it is another option. When so much effort to revive traditional bank lending yields such meagre results, alternative remedies will increasingly become the norm. «