Leveraging novel financing options for the advantage of small businesses

In the rapidly evolving landscape of small business finance in the UK, traditional banking methods are being challenged by alternative lenders, primarily fintech firms. These new players now account for approximately 59% of new SME lending, surpassing the 41% held by high street banks [1].

This shift is due to the agility, speed, and flexibility alternative lenders provide, which traditional banks have found difficult to match. The current state of alternative financing options for small businesses is robust and expanding, offering faster loan approvals, more tailored loan products, and simpler eligibility rules [2][3].

Key features of this alternative financing landscape include technology-driven lending, flexible lending products, higher approval rates, and a growing impact on traditional lenders [2][3][4]. Technology-driven lending uses digital platforms and real-time cash flow underwriting to deliver faster approvals, while flexible lending products cater to a wide variety of needs, such as cash flow loans, short-term loans, invoice financing, asset financing, and peer-to-peer lending options [2][5].

The market demand and approval rates of alternative lenders are also noteworthy. Alternative lenders approve a higher percentage of SME loan requests (about 71%) compared to traditional banks (~58%) [2]. This willingness to accommodate smaller or unconventional businesses often rejected by banks is driving a retreat from the SME credit space by traditional lenders, creating a "chokehold" for SMEs relying on traditional sources [1][3][4].

In response to this shift, banks are reconsidering their digital capabilities and customer engagement strategies to stay competitive [1][3][4]. Regulatory and market shifts, such as the growing customer willingness to switch to alternative providers and the proliferation of non-bank lenders like Funding Circle, ThinCats, and iwoca, suggest reduced barriers to SME finance innovation [4].

Among the various alternative financing options, invoice and asset finance are experiencing significant growth [6]. Invoice finance allows businesses to borrow against the value of invoices outstanding from customers, providing more flexible access to finance. Asset finance enables firms to borrow against their physical assets, either existing or new.

In a recent development, GoCardless, a payments company, is set to launch a new finance facility on October 22, 2024. This facility will offer pre-approved capital facilities to many of its small-business customers. Unlike traditional finance, businesses using GoCardless's service will pay a fee for the facility, rather than interest charges [7]. This new finance facility could be a more effective and affordable way to secure funding for many businesses.

It's important to note that such support from GoCardless may not show up in official data on credit. Additionally, embedded finance providers enable small companies to offer their customers the opportunity to spread payments for products over instalment plans [8]. Embedded finance providers, like GoCardless, take the credit risk, making financing more accessible for small businesses.

However, it's worth mentioning that lending to small businesses fell in all regions in 2022, and the supply of traditional credit has diminished in recent years, partly because small businesses are realizing there are often superior alternatives [9]. The British Business Bank's analysis primarily focuses on traditional forms of finance for small businesses, such as loans and overdrafts [10].

In conclusion, the funding environment for small businesses is evolving, with rapid growth in invoice and asset finance. The introduction of GoCardless's new finance facility is set to widen the range of financing options available for small businesses, further transforming the UK SME finance ecosystem [7]. This ongoing structural change signals a long-term shift in capital allocation in the UK business lending market, with fintech-led lenders playing an increasingly central role [3].

References:

Fintech firms now account for over half of new SME lending in UK
Alternative Finance in the UK: A Bright Future for Small Businesses
The Rise of Fintech and the Decline of Traditional Banking
The Impact of Fintech on Small Business Finance
The Different Types of Alternative Finance for Small Businesses
Invoice and Asset Finance: What You Need to Know
GoCardless to Launch New Finance Facility for Small Businesses
Embedded Finance: A New Era for Small Business Lending
Lending to Small Businesses Fell in All Regions in 2022
British Business Bank's Analysis Focuses on Traditional Forms of Finance for Small Businesses