Building an alternative future
It’s an irony for small businesses that when it comes to finance, the more they need it, the less there is. With interest rates up for a fourth consecutive time in May and inflation forecast to be as high as 10% by the end of 2022 – a 40-year high – the economic outlook is highly uncertain. Traditional lenders are nervous and wary of increasing lending to SMEs, which already saw their debt rise by a quarter during the pandemic, and it’s no longer just struggling businesses that have a hard time securing funding.
Even in good times, high street banks are highly risk-averse. One consequence is that, despite the UK’s desperate need for more homes and the strength of its property market, funding for SME development projects from high street banks is limited. It’s a key reason behind the slump in the number of small businesses in the sector we’ve seen in recent decades.
SME business owners in construction and development often fail to meet strict lending criteria. These include several years of trading with solid accounts, credit checks based on historic finances, not future cash flow, and other inflexible rules. There’s usually little opportunity to make a case for funding if these aren’t met due to heavily automated and standardised processes. It’s a vanilla offering for vanilla businesses and, all too often, the computer says no.
Moreover, despite these standard processes, the decisions and delivery of funding can lag even if the initial application is successful. That doesn’t just cause delays in money coming through; it may never materialise. The initial decision can be overturned two or three months down the line following due diligence checks, causing massive problems for developers, often already struggling with the widespread disruptions and delays we’ve seen to supplies.
For those that need capital quickly, traditional lenders might not be the place to go. Put simply, it’s not the high street banks that will get Britain’s SMEs building a better future, so where can they turn?
For small and medium builders, construction companies and developers, alternative finance such as peer-to-peer lenders offer much greater opportunities.
First, many traditional lenders’ criteria simply don’t feature, while others are applied more flexibly with consideration given to a business’s individual circumstances. For instance, alternative lenders can be more forward-looking when it comes to credit scoring, accounting for future cash flows that will be available to service the debt. Those with a strong case can also find support from alternative lenders from their early stages without having to provide evidence of a track record and years of accounts.
That’s largely the result of such lenders writing business on a smaller scale to take a more bespoke approach. Many alternative lenders are highly tech-enabled, but they’re unencumbered by big banks’ legacy systems and processes. They also combine the use of algorithms with the human touch to handle applications case by case.
The result is not just a more flexible approach but faster decisions. The algorithms can give instant answers on the spot, allowing successful applications to proceed, while anything that doesn’t tick all the boxes can be picked up and explored by the lender. The relationship manager can run through the details, consider the business and requirements in question and potentially overturn the decision. Borrowers can generally get funds from an alternate lender in less than a week, with turnarounds of three to five days.
An industry transformed
So, alternative lenders are more likely to put their trust in SMEs, but can SMEs trust them? There’s good reason to think so.
We should acknowledge that the track record of P2P lending in the UK has not always been great. But both the sector and lenders have learned from past mistakes in the industry. Moreover, FCA regulation has transformed standards, ensuring compliance and protection for customers. To get a license at all, lenders must go through the regulator’s rigorous due diligence, providing reassurance for investors through P2P lending platforms and the borrowers relying on them.
In a time of increasing uncertainty, there’s a strong argument that SMEs used to turning to the big names on the high street could find they’re better served looking at the alternatives. At the very least, they might be pleasantly surprised to find their trust reciprocated.