While the UK economy shows signs of recovery after many years in the economic doldrums, things aren’t picking up fast enough for small businesses. The SME sector – totaling nearly 5m businesses in the UK and long considered the backbone of the national economy – is still struggling, particularly when it comes to access to growth finance. According to official Bank of England figures, lending to SMEs by the major UK banks actually fell by £723 million in the first half of this year. It is in this gap between current bank lending practices and the needs of the small business market, that merchant cash advance funding and other forms of alternative financing can help to fuel job growth and stimulate the wider economy.
‘Credit Crunch’ Continues for SMEs
Without access to adequate finance, small businesses are not able to expand into new markets and territories, fuelling job creation along the way. This vicious circle isn’t limited to the UK’s SME sector, of course. In the US, too, small businesses – among the largest contributors to job increases – are being denied access to funds due to the strict regulations in place. As Ben Bernanke, Chairman of the Government Reserve, recently put it, “the lack of ability to get business credit to expand your small business is among the reasons why job development is comparatively slow.”
The Treasury and the Bank of England have both encouraged banks to lend more over the last couple of years in an effort to get the small business economy moving. However, despite the fact that bank lending has increased, the beneficiaries have been mostly larger companies, not small businesses. It is not all the fault of the banks, however. Strict capital requirements – set up in the wake of the financial crisis to avoid another such crash – inevitably stifle business lending by banks. This is because lending to SMEs is considered more risky and therefore higher capital is required to safeguard against bad loans. If you’re a small business without enough security or without a perfect credit history, getting a business bank loan can seem like a Herculean task.
Merchant cash advance financing, which provides a cash advance to businesses based on their future sales receipts, is one form of financing particularly well suited to businesses with poor credit history. Provided the business has strong enough sales figures, even businesses with a low credit score can easily access the finance they require. While repayment rates may be higher than standard bank loans, they are designed to be paid off faster and in line with sales receipts. This means that repayments are higher when business sales are strong but reduced when business is slack, giving flexibility to small companies over the repayment of their advance.
Lack of Awareness
Another factor that adds to the problem of small business finance is lack of awareness among business owners about alternative forms of finance. Many small business owners, after getting rejected by their bank for a loan, simply give up trying to acquire the funds they need for expansion. As a result, they are unable to grow their business and contribute to job increases. In fact, under proposed new rules announced by the Treasury in August, the UK’s largest high street banks are to be forced to help SMEs find alternative sources of finance if they have refused them a loan. If banks are unable to offer a suitable loan to an SME, they must help to connect them to an alternative finance provider or challenger bank that may be better placed to assist.
As more small business owners are made aware of existing lending opportunities, the UK’s alternative finance sector will continue to grow. The industry – which includes merchant cash advances, lease financing and peer-to-peer (P2P) lending – has grown significantly in recent years and officially broke the £1 billion barrier in revenue at the end of last year. As more small businesses look to alternative finance to fund their growth, the market will become less and less an ‘alternative’ and more a part of mainstream finance.
Whether through a merchant cash advance or another form of alternative financing, providing the UK’s small business sector with access to growth capital is the key to job creation and a motor for economic growth. Small business owners should explore alternative financing opportunities to help them decide how best to grow their business.