For the SME market, the banks still make up to main source of finance – despite all the tightening regulations and bad press that they receive. However, due to the increasingly harsh lending environment that many small businesses are experiencing, looking for an alternative way to solve funding problems is often the right thing to do.
Four of the main high street banks in the UK account for nearly 80% of SME lending. This is despite the fact that lending fell sharply in 2008 and continued to weaken into 2009 and beyond, leading to the sharpest fall in recent years in February of this year.
Project Merlin did not reach the projected targets set by the government, falling short by over £1bn. RBS in particular fell significantly short of its proposed quota.That said, this still meant that SME received around £74.5bn from the banks last year.
We’re already well aware of the proposed funding gap of £191bn over the next five years. But why is bank lending no longer cutting it?
The problem is further heightened by the Basel III agreement. This is a global framework that regulates bank capital, liquidity and leverage in the wake of the recession. It encourages banks to hold more capital and therefore restrict lending to high risk ventures – such as SMEs and start ups.
These are weighted as high risk ventures for banks – and when combined with the increasing need for funding and the rise of the cost of capital for banks to lend to small businesses, this all means that bank models of lending could shift away from SMEs all together. This is exactly the opposite of what SMEs need.
In order for businesses to overcome these obstacles to solving their cash flow problems, looking outside of the banks is often necessary. Alternative financing such as crowd sourcing, invoice finance, factoring and asset based finance can all give SMEs options to combat cash flow woes without relying on the traditional routes to finance.