Trends in lending
17th October 2014
Many growing businesses still regard bank lending as their main source of funding when it comes to finance for their companies.
“Trends in Lending” is a quarterly publication issued by the Bank of England, the latest instalment was in July and the next instalment comes out this month.
So far this year it has not painted the rosiest of pictures for an economy whose businesses see the UK banks as their main source of credit and support – recent statistics show that 80% of all credit and support for small and medium sized businesses comes from UK banks.
If you read the reports from the CBI, small and medium sized businesses are a significant part of the UK economy, some would say the “back bone”.
It is always difficult to say what constitutes a small, medium or large business but the number of employees is one metric that is often used.
At the start of 2013, small and medium sized businesses accounted for around 60% of employment and 50% of turnover, but their percentage of UK bank lending is at only around 40% of all non-financing businesses.
But if 80% of their funding comes from UK banks, small and medium sized businesses looking to raise funding need to look at the UK banks and the variety of products, facilities and assistance they can offer.
Banks do not offer a “one size fits all approach”, but instead provide a range of options from which businesses can choose. At the current moment in time, products that have been available for over a century are coming to the fore again, with a revival of export finance and asset backed lending.
There are other alternatives as well. For example, there has been a lot in the press in recent times about peer to peer lending and crowd funding but there still appears to be a lot of uncertainty about these newer forms of finance.
In some surveys, half of those asked were unsure of what peer to peer lending and crowd funding were and half were also unsure of the benefits.
There are some interesting examples of peer to peer lending which have been identified in the press over the last year or so, two of the most high profile for obvious reasons being Naked Wines and Hotel Chocolat.
Naked Wines is an angel investment scheme where, in exchange for a monthly payment / investment which is invested in small or independent wine producers, the “angels” are able to buy the resulting wines at wholesale prices, the monthly payment being credited against purchases.
Hotel Chocolat issued a chocolate bond three years ago where, instead of providing financial returns, it rewarded investors with chocolate. It has proved to be a highly successful scheme. When the bonds came up for renewal last year, only £100,000 of the £4m raised was redeemed by investors.
In addition to these schemes, there are also some alternative products which are referred to as “Shadow Banking”.
However, unlike crowd funding these products are unregulated, so investees need to be careful when considering their use.
Given the uncertainty of these schemes and the fact that you need to have a business that attracts investors, the bank’s role as traditional lender will remain very important.
The question for a lot of businesses is – where do you start?
Drawing up a comprehensive business plan is a must. Not only will this help you to decide how much funding you need, it will also focus on the priorities for the business and will be crucial for banks or other investors assessing your suitability for financial support.
Once your business plan is in place, it will then be a question of deciding what kind of finance package to apply for and who to apply to.
The Government-run British Business Bank, which is aiming to shake up the finance market for SMEs and widen access to sources of funding, is a good source of information about the options available.
Its website at www.british-business-bank.co.uk has a series of guides on funding and issues to consider before applying for finance while the British Business Bank itself aims to help unlock up to £10bn of new finance for UK businesses.
It will be interesting to see what effect it has on the market in years to come.
Partner, Head of Banking
* For further information on the issues raised in this article, please contact Julie Harrison
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