At first glance, the data on small-business finance looks worrying. A study by the British Business Bank suggests that lending to small businesses fell in every area of the country other than the southeast last year. That followed the experience of 2022, when lending fell in all regions.
However, all may not be what it seems. The British Business Bank’s analysis is largely based on traditional forms of finance for small businesses: loans and overdrafts, often arranged through the business’s bank account provider. In recent years, we’ve seen a huge expansion in the range of finance on offer to small firms, that are often from new entrants very different from mainstream lenders.
A product launch on 22 October 2024 from the payments company GoCardless is a good example of how the finance market is evolving. Since GoCardless processes millions of transactions for small companies using its services, it has a very good idea of how well they are trading.
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It is teaming up with a financial technology (fintech) partner to use this data to offer many of its small-business customers pre-approved capital facilities they can draw from when they need the money. Businesses pay a fee for the facility, rather than interest charges as with conventional finances, and don’t have to provide collateral or personal guarantees from directors.
Such support won’t show up in official data on credit but could be a much more effective and affordable way to secure funding for many businesses. It also widens the range of financing options available. That is important since traditional loans and overdrafts aren’t especially well-suited to many funding needs.
The rapid growth of invoice and asset finance is another example of how the funding environment for small businesses is evolving. Invoice finance enables businesses to borrow against the value of invoices outstanding from customers. Asset finance enables firms to borrow against their physical assets – either existing assets such as plant and machinery, or new assets if they are borrowing to fund investment. Both can provide much more flexible access to finance.
We’re also seeing growth in the use of options such as merchant cash advances, available to businesses borrowing against future card transaction earnings, and fast application loans, which have some similarities to the payday loans previously available in the consumer finance market, albeit with more safeguards built into the products.
The rise of embedded finance also gives small businesses access to credit as they pursue growth. Embedded finance providers enable small companies to offer their customers the opportunity to spread payments for products over instalment plans, which can drive higher sales. The provider, rather than the business itself, takes the credit risk.
All of which is to say that headlines about lower lending to small businesses may be misleading. It’s certainly true that the supply of traditional credit has diminished in recent years; in truth, it never recovered from the global financial crisis more than 15 years ago, when banks started to reassess their attitude to risk. But demand for such credit is also down, partly because small businesses are realising there are often superior alternatives to the financing options of the past.
For businesses planning their financing – both day-to-day cash flow and longer-term growth finance – getting to grips with this broader range of choices is important. You may find it much easier to get funding than you imagine – and often through products and services that are a much better fit to the needs of your business.
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