SMEs: Do we really need a banking inquiry when other sources of funding are filling the gap?

The Small Talk column

Will another competition inquiry in the banking sector produce tangible benefits for small businesses when it gets round to reporting in 18 months’ time? Previous investigations have failed to stimulate the competition small businesses want to see in the business bank account market, let alone improve the funding environment for firms struggling to expand and grow.

Do we need this inquiry? When it comes to finance, the competition for small businesses’ attention has never been fiercer – not from the banks, which remain mired in funding constraints and bureaucracy, but from an entirely new source.

A report from the innovation group Nesta and the University of Cambridge reveals that by the end of this year, the UK’s alternative finance market will be worth £1.74bn. Moreover, say the duo, the exponential rates of growth seen in sectors such as peer-to-peer lending and crowdfunding, allied to tacit government backing through regulation and tax breaks such as individual savings accounts, mean that by the end of next year the figure will stand at £4.4bn.

While alternative finance began with platforms such as Zopa, which facilitate lending to consumers, it is the business finance element of this market that is zooming ahead. Nesta says that by the end of the year, small and medium-sized businesses will have raised a little over £1bn from the alternative finance market.

That’s the equivalent of 2.4 per cent of the total amount of lending to small and medium-sized businesses that the Bank of England says the mainstream banks have offered.

While that might not sound significant, think about how quickly alternative finance has reached that figure. The market as a whole has grown by 161 per cent over the past year, following growth of 150 per cent during the previous 12-month period. Within the overall figures, business finance is growing fastest – peer-to-peer business lending is up 250 per cent over the past year, while equity crowdfunding has grown 410 per cent.

In other words, the alternative finance market is more than doubling in size each year and growth rates are accelerating very rapidly. There’s no reason why it couldn’t account for 5 per cent of bank lending to small and medium-sized businesses by the time the Competition and Markets Authority gets round to reporting – and even more thereafter.

There is certainly plenty of room for further growth. Nesta’s research suggests that 44 per cent of small and medium-sized businesses are now familiar with alternative finance, but only 9 per cent have any experience of using it. Both figures will rise dramatically in the years ahead.

It’s not just the issue of availability of finance that is prompting businesses to consider alternative finance providers rather than the banks. They’re also attracted by the innovation the sector offers – exactly the kind of innovation that is so sorely missed in traditional banking.

So, for example, while peer-to-peer business lending, invoice trading and equity crowdfunding currently dominate the alternative finance market, new types of financing arrangement are growing up all the time. Directors’ pension funds are an increasingly interesting option catered for by several platforms, while other options include a range of debt-based securities and niche areas such as community shares.

Meanwhile, alternative finance providers are also innovating to ensure the supply of finance continues to increase alongside the rising demand – by reassuring nervous investors, for example. Regulation of the sector has been formalised, but unlike conventional savings and investment products, the Financial Services Compensation Scheme does not stand behind alternative finance providers in order to pay redress if people lose out because a platform goes bust. Several providers, however, are offering insurance arrangements that will do exactly that.

This is a sector on the move in ways with which the banking industry cannot hope to compete. There are people in the alternative finance sector who talk about replacing the banks as the mainstream providers of funding to our small businesses – and while those claims sound fanciful, the statistics are increasingly compelling. Never mind the CMA – competition has already come to banking.

Heavy lifting done by a few firms

Just 1 per cent of companies were responsible for generating 36 per cent of economic growth last year, creating two in three of all new jobs in the UK. These are the stand-out statistics from a report by Octopus Investments and the Centre for Economics and Business Research, which argues for a much more targeted policy response.

The research suggests that small businesses with a turnover of between £1m and £20m and average annual growth of 20 per cent or more over a three-year period are doing most of the heavy lifting when it comes to turning round the UK’s fortunes. But such businesses are often lost within the broader small and medium-sized enterprise sector, Octopus and the CEBR argue, and don’t get the support they deserve.

“Our survey of 400 such businesses highlights the particular and important challenges that they face in their journey towards further expansion,” said Graham Brough, the chief executive of the CEBR. “Access to capital, skills shortages and the rate of taxation in particular were found to be key issues.”

Help needed on telecoms options

Small businesses need more help in order to get a better deal on telecoms services, a report from the industry regulator, Ofcom, warns.

Its research suggests that one in six small businesses don’t feel well-informed about their communications options, while a third aren’t confident enough to look for new products and services that might boost their business.

Ofcom is publishing the research as it unveils a new website aimed at small and medium-sized enterprises (see www.ofcom.org.uk/adviceforbusinesses) interested in switching telecoms provider – though satisfaction rates in providers are relatively high, the watchdog thinks more firms should be shopping around for a better deal.

The regulator also urged telecoms providers to speed up the roll-out of new services. “We’ve already identified that SMEs are not benefiting as consistently as they should be from high-quality digital communications,” said Ofcom’s chief executive, Ed Richards. “In particular, there is a greater need for more widespread availability of high-speed broadband and reliable mobile coverage.”

Small Business Person of the Week: Kelsey Ramsden, Founder, Kelseyramsden.com

“I suppose I’m what you’d call a serial entrepreneur – I’ve launched a number of businesses over the years, starting with a civil construction company in my late twenties. But after having my third child I was diagnosed with cancer and I had to bring professional management in while I concentrated on getting well.

“While I was recuperating, I launched SparkPlay, a children’s toys business to which families can subscribe. I loved the work but I no longer have time for it because my other venture, Kelseyramsden.com, which I launched last year, has taken over. I now spend all my time providing coaching and mentoring to other entrepreneurs, as well as speaking and lecturing on entrepreneurship.

“I understand exactly what it’s like to be someone who has started a business and doesn’t really know what they’re doing day to day – people need to be hearing that it’s going to be ok jumping off the ledge.

“My latest project is working with Youth Business International on Global Entrepreneurship Week, which runs from 17 November – I’m going to be speaking several times a day at a series of events.

“It’s important that entrepreneurs speak to the younger generation because the traditional career path is on the verge of extinction; whether they’re going to be full-blown entrepreneurs or not, young people are going to need ingenuity and courage in the world of work.”

@davidprosserind