Reluctant borrowers: What’s holding them back?
Ian Harper drills deeper into the ICAS “Reluctant Borrowers” research, to look at some of the reasons why SMEs are reluctant to raise debt-based capital.
The recent ICAS research report Reluctant borrowers? Examining the demand and supply of finance for high-growth SMEs in the UK paints a picture of high growth SMEs that are reluctant to borrow to find further expansion. But why so?
"Many of the entrepreneurs we come across are in their late 20s or early 30s which means they may not yet be on the property ladder.”
However, if a company seeks funds with no assets or cash flow then some form of security needs to be considered to protect the borrower.
Entrepreneurs have typically been required to offer property as collateral but many are young and may not yet be on the property ladder.
"Conditions can be complicated, so understanding why the requirement is needed and what the consequences are is important to establish from the beginning.”
This is the process, says Perlman, where “over the course of the last few decades banks have increasingly focused their relationship managers on large companies, while centralising and automating underwriting processes for smaller loans”.
Such an approach has helped create a situation where the banks can’t relate to SMEs, probably because they don’t fall into these funding categories, but also because the high-growth ones may be perceived to be too risky.
Gareth Magee CA, a Partner with Scott-Moncrieff, says: “I think a big part of [the banks’] inability to lend again lies in the loss of a generation of valuable banking relationships.
"The last 10 years have seen the banks lose individuals, knowledge and connections with both SMEs and intermediaries. These valuable connections will take a long time to be re-established.”
Perlman says it has also created a ‘funding gap’. “In 2013, the National Audit Office reported
that there was an estimated ‘funding gap’ of between £10bn and £11bn in the UK,” he explains.
“They said that by 2017 this figure [the demand for loans that the market is unwilling to supply] may rise to about £22bn. In our experience this gap relates to a very specific portion of the SME market as big banks in the UK tend to focus on either small loans (in the tens or hundreds of thousands) or large loans (typically above £20m), neglecting the ‘middle child’ of loans between £500k and £20m.”
Trust is gone
Alistair Dickson, a Partner at RSM UK, agrees: “Trust is an issue. The business practices that were uncovered following the financial crash in 2008 have made businesses warier.
"In addition, increased regulation and a more restricted appetite to risk create more barriers to lending and can be perceived as a lack of support, particular within some sectors.”
For Bruce Davis, a joint founder of alternative lender Abundance, the issue is less to do with trust. “It is more about being able to deal with someone who really understands your business and isn’t driven by a computer decision at head office,” he says.
Kevin Vendel, Senior Partnership Manager at Spotcap UK, a specialist in lending to SMEs, believes there’s an opportunity here the banks should grasp. He says: “Alternative lenders use innovative technology to manage the demands and needs of consumers, with a focus and efficiency previously unseen.
"They are particularly suitable as partners for banks as they are a delivery system for continued quality and innovation. In addition, they have the potential to help banks innovate, build trust and create new user experiences.”
He adds: “Improving customer service is another important part and some banks have recently started collaborating with alternative lenders to improve their user experience and address client demand. This willingness to change is an important aspect of rebuilding trust.”
The full version of this article can be read in the July/August edition of CA Magazine.