Who do SMEs ask for financial advice?

Author Madhvi Mavadiya

Date published October 21, 2015 Categories

New research from the Business Banking Insight (BBI) has found that younger small to medium sized businesses tend to stray away from older companies when seeking out finance and information when attempting to expand the business.

BBI reported that “an ICM poll of 5,000 SMEs across the UK found that 42% of businesses formed after 2010 would consider approaching acquaintances and relations for business investment and 64% of these businesses would turn to their friends and family for guidance around finance.

This compares to just 22% of businesses created pre-2000 who would think about using this type of finance and 45% who would ask their nearest and dearest for information.”

Alongside this, 36% of companies that were created after 2010 said that they would consider peer-to-peer lending in order to expand their business, in comparison to the 18% who had the same attitude but were from firms that were created before the year 2000.

Federation of Small Businesses Policy Director and spokesperson for the BBI, Mike Cherry, explained that the BBI can help the business get the right advice. “Accessing the best product for your business is critical to growth and future investment,” Cherry said.

John Longworth, Director General of the British Chambers of Commerce and spokesperson for the BBI, also felt the same way. “The divide between older and newer companies in attitudes to seeking business finance and guidance highlights a change in approach by businesses’ to driving growth. The finance needed to drive growth can and should be tailored to the specific needs of each business, so it’s vital that traditional lenders and advisers adapt to meet the changing demands of SMEs,” Longworth highlighted.

Non-banks spark competition in lending and supply chain finance

Author Graham Buck

Date published August 26, 2015

Banks believe that new digitally enabled supplier finance networks and alternative lenders pose a significant threat to every part of the commercial lending business, claims Misys.

A survey by the financial software company took answers from 114 respondents within 77 banks across the US, Europe, the Middle East and Africa (EMEA) and Asia Pacific (APAC). They were asked to share their views on the threats and opportunities created by digital disruption in commercial lending, trade and supply chain finance (SCF).

Among the responses from the survey respondents, 68% cited small business lending as being under high threat and 61% saw competitive pressure in SCF product lines, such as receivables finance and factoring.

Eighty-four per cent said pressure on pricing of loan products as a challenge, while 75% feared loss of market share to alternative lenders.

According to Misys, banks have been under pressure since the 2008 financial crisis, as demand for credit from small and medium sized businesses has risen, but increased regulation and scrutiny of balance sheets has diminished lending capacity.

It says that the rise of alternative financiers, peer-to-peer (P2P) lenders and new supplier networks in the market is leading banks to re-evaluate their operating models and embrace partnership, new technology and more agile approaches to lending and trade finance.

A report issued by Grant Thornton found that in 2014, 60% of businesses in the mid-market were already using non-bank lending as a source of finance, showing that “it is no longer a fringe activity, but one that is widely considered normal by corporates,” notes Misys.

Despite these challenges, the Misys survey results show that banks also believe that a strategic partnership with non-bank players can be a strong driver in growing their trade finance business, with 68% citing that they see this as a big opportunity.

The banking sector understands that it must now react to remain at the centre of corporate credit requirements,” said David Hennah, head of trade finance at Misys. “Our survey respondents believe they can leverage emerging supplier networks and the financial technology vendors that can provide digital enablement and connectivity across trade and lending to grow and retain clients.

We have seen an increasing focus on strategic technology partnership. Clients want to build trade and lending platforms that help overcome their technical debt in digitally enabled corporate banking and build a foundation to dictate future innovation.

Innovation is outpacing the limitations of legacy bank frameworks. By thinking differently and embracing change banks, in partnership with their vendors, can define new value propositions along clients’ financial supply chains.”

Peer-to-peer lending: the only way is up

The post- global financial crisis era has provided ideal conditions for the growth of P2P platforms, which is set to continue but accompanied by greater regulatory scrutiny.

Author Graham Buck

Date published August 18, 2016

A decade on from the peer-to-peer (P2P) lending business model being pioneered in both the US and the UK, the P2P model might not yet be providing major competition to the banking sector but the concept has spread to many other countries.

In its recently-published report, ‘Global Peer-to-peer Lending Market 2016-2020’, Dublin-based Research And Markets, which describes itself as “the world’s largest market research store” forecasts that the P2P lending market worldwide will enjoy a compound annual growth rate (CAGR) of 53.06% over the period 2016 to 20120.

Indeed, in the wake of Brexit, that projected figure may prove overly conservative. The impact of the UK’s decision to exit the European Union has created fresh uncertainty on global economic growth prospects and probably extended the era of low, zero and negative interest rates. The Bank of England (BoE) has already cut its base rate – already at a record low of 0.5% since 2009 – even further this month, to 0.25%. With investors having to look further afield for decent returns and ready to accept a greater degree of risk in return. The shrinking branch networks of many European banks provides a further spur to online lenders.

The P2P sector’s attraction to investors increased significantly in the wake of the 2008 global financial crisis, when central banks around the world responded with sharp reductions to interest rates and much lower returns on conventional savings accounts. With the US currently the only major world economy where rate hikes are a likely prospect in the near term – and even then likely to prove only modest – this attraction is steadily increased.

Many P2P platforms focus on property lending and consumer loans rather than lending to business; indeed research and analysis firm Business Insider predicts UK P2P lending will grow at a 45% five-year compound annual rate to reach £16bn (US $21bn) by 2020 and expects property lending to represent the largest share of P2P activity by the end of this period.

Most recently, P2P lending has started to become established in China, where investors are similarly frustrated by low interest rates and have turned to the country’s underground or shadow banking system for better returns. While still a fledgling sector in comparison to the US, over the past two years the number of Chinese P2P companies has increased from 880 to around 2,600.

A report by the Association of Chartered Certified Accountants (ACCA) suggests that the volume of P2P lending in China had reached anywhere between US20bn to US$40bn by the end of 2015. Growth has been sufficiently swift for the Chinese Banking Regulatory Commission (CBRC) to last year issue proposals for regulating the P2P industry to reduce risk. China’s government introduced its first major internet finance ‘guidance’ policy in July 2015, which imposed measures such as minimum registered capital requirements for online P2P platforms.

Drivers for growth

The post global financial crisis era and the impact of the Basel III capital adequacy regime on the banking sector – and the appetite of its members for lending to smaller businesses – has been a key driver for the P2P market’s growth.

P2P enables individuals and businesses to both lend money and have easy access to funding via an online platform, thereby eliminating the banks and reducing the costs of intermediation. Investors can gain a higher rate of interest and borrowers gain funding at a lower rate than those available from many other sources. P2P industry pioneers such as Funding Circle, active on both sides of the Atlantic, have developed their platforms using extensive data sets and algorithms to assess the creditworthiness of borrowers using a range of variables like credit scores, financial history and social media usage. Over the years, the business model has evolved and a growing number of institutional investors have used P2P platforms to develop a loan portfolio.

According to Research And Markets, a steady increase in loans to small and medium enterprises (SMEs) will be a main driver for the P2P market’s growth. “We expect more P2P lending and crowd funding with government support, which would help investors to make small investments in private companies,” the firm notes.

“The European Commission (EC) is evaluating soft-law measures that could help promote P2P lending and crowdfunding across Europe. The Commission is investigating how government funding could be aligned to support P2P lending and crowdfunding platforms and investment opportunities during the forecast period.”

However, one of the potential clouds seen on the horizon by the firm is increasing regulatory risk. “If we look at the present market, the P2P lending platforms are subject to regulations that are for certain consumer banking and other financial institutions,” the firm comments.

“The consumer credit that is provided by the banking and financial institutions are subjected to a number of laws (which) regulate the credit life-cycle that includes underwriting, payment terms, agreements and disclosures, advertisements and solicitations, and debt collection practices.

“There are also other laws like privacy and data security and anti-money laundering laws (AML) that regulate the relationship between the customers or borrowers and the banking and financial institutions.”

Greater regulatory scrutiny can also be expected in countries where P2P platforms are still in the early stages of development such as India, which has no more than around 30 companies. Nonetheless, the Reserve Bank of India (RBI) is already deliberating on how the sector should be regulated; publishing a discussion paper with proposals for regulating P2P lenders last April. P2P could extend financial inclusion in a country where groups such as SMEs and small farmers have often found it difficult to access loans from the banks.

The P2P sector has also attracted some negative headlines in recent months, such as the resignation in May of the founder and chief executive officer (CEO) of San Francisco-based Lending Club, which had moved its focus from P2P lending to consumer loans. Renaud Laplanche lost the confidence of the board following allegations of a lapse in its business practices