Comment: Digital lenders can be game changers for SMEs

Companies like Ed Molyneux's FreeAgent show the potential for entrepreneurs in Scotland, says Williams. Picture: Contributed.
Companies like Ed Molyneux's FreeAgent show the potential for entrepreneurs in Scotland, says Williams. Picture: Contributed.
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Alternative finance providers can step over the Border to step up funding for SMEs, writes Greg Carter, chief executive at small business lender Growth Street.

This year’s EY Attractiveness Survey announced that, for the sixth year in a row, Scotland has been the UK’s best-performing destination for inward investment after London. With Edinburgh and Glasgow leading the charge, Scotland has a claim to be the UK’s largest financial hub outside the City.

The success of high-growth Scottish businesses in recent years has been well documented. One only has to look at the rising profiles of BrewDog, Skyscanner and FreeAgent to see how much potential there is for entrepreneurs in Scotland.

All this is great news, you might think. Yet in the 12 months to March 2018, government figures show that there was a 2.5 per cent year-on-year decrease in the number of businesses in Scotland. Why, when Scotland seems to be riding high, are so many businesses struggling?

In my view, it all comes down to the support business owners are given. There are currently around 340,000 small and medium-sized enterprises (SMEs) operating in Scotland, providing 1.2 million jobs. These businesses account for 99.3 per cent of private sector companies. The statistics paint a picture of just how important smaller businesses are to Scotland’s – and the UK’s – economy.

But these businesses have a lot on their plate when it comes to funding. Over the ten years since the financial crisis, the big banks have steadily withdrawn access to the most flexible business finance product: the traditional overdraft. Growth Street research suggests that total overdraft lending is down by as much as £18 billion compared to 2008.

These figures paint a picture of a funding landscape that’s changed dramatically in recent years. Not so long ago, local business owners and entrepreneurs could have bumped into their bank manager on the high street. Today, thanks to increasingly centralised systems and automation, it’s almost impossible to know who you’re going to speak to before you give your bank a call.

Fewer bank branches, outdated technology and stricter regulations have created a vacuum for our SMEs. Alternative finance providers offer some relief through new products developed to plug this gap. Funding Circle’s initial public offering earlier this year was a real endorsement of how far these digital challengers have come.

But has Scotland been left behind amid this wave of innovation? A Nesta report last year indicated that looking across UK regions, Scotland was fifth in terms of its adoption of alternative finance, behind the South West, West Midlands, London and the South East. With so many ambitious SMEs looking for growth, surely finance providers can give Scottish businesses the support they need?

One potential stumbling block could be the slightly different ways in which business lending is carried out north of the Border. These nuances may have prevented younger finance providers elsewhere in the UK from expanding into Scotland to offer their services. I’m delighted that Growth Street is now able to work with Scottish companies, and I would urge other challenger brands to get their skates on and do the same, because I think there is an enormous opportunity for alternative finance providers to do great things for business in Scotland.

The offerings from many alternative finance platforms could add real value to businesses. Slick technology can enable real-time integrations with cloud accounting platforms, for instance, simplifying the day-to-day administrative requirements for busy business owners. In addition, the range of products available from non-bank funders is impressively diverse. As well as invoice factoring and term loans, products similar to traditional bank overdrafts are also available, potentially giving entrepreneurs really flexible finance without the trials and tribulations of applying through a bank.

I think it’s imperative that ambitious business owners consider these options when thinking about where to go for finance. A “no” from a big bank doesn’t have to mean no from everyone: in some cases, smaller challengers distinguish themselves from other options by basing their funding decisions on more than just a spreadsheet. Providers that understand their customers and go the extra mile to build long-term relationships, as well as offering the right level of funding to fuel businesses’ growth, could be in pole position to give Scotland’s SMEs the support they need.

I may sound like a broken record, but I’m passionate about giving SMEs – the backbone of Scotland’s and the UK’s economy – the capital they need to grow. I want to see finance providers right across the UK tackling this issue. Scotland has plenty of businesses hungry to put capital to work. Alternative finance providers have to present themselves as viable options if Scotland’s small business owners are to succeed over the long term.