23rd July 2014

Ayan Mitra: The Banks are failing small business

Now it’s official – the banks are failing small businesses.

Our CEO, Ayan Mitra, pulished his thoughts on last week's bank lending figures in his linked in blog: 



Now it’s official – the banks are failing small businesses. The Competition and Markets Authority’s announcement today (FRIDAY) that it’s considering a full-blown investigation into the poor competitive practices of the high street banks comes as no surprise to those of us who have witnessed their treatment of SMEs in recent years. That small firms feel neglected by their banking providers and starved of borrowing is something that I hear almost every day.

Yes, the Bank of England’s latest Trends in Lending figures do show an increase in net lending to businesses in the last quarter. But available credit is still vastly down on its peak in 2008. Money being made available to the small business community still falls far short of demand, with the smallest enterprises particularly suffering. What a waste. We all know that under-financed firms struggle to survive, living for as long as they can on cashflow, then slowly dying. Others have to shelve plans for growth – plans that are otherwise well-considered and achievable.

But there’s a fundamental problem behind this lack of liquidity for SMEs that is often overlooked. I would argue that many entrepreneurs are pursuing the wrong goal, favouring debt over equity. The big banking institutions have rigid criteria against which they assess businesses seeking loans, and commonly small companies fail to demonstrate that they have the necessary cashflow and assets to justify a bank’s backing. In essence, they’re asking the wrong things of the wrong people.

Particularly for early stage start-ups, debt often isn’t the right instrument. When a company is young and has little money coming in or valuable equipment or property to its name, conventional funders are unlikely to offer credit. That’s just the way of things in the current lending environment. Yet, there are tens of thousands of small and medium firms that need and deserve growth finance. At the same time, a community of investors is growing up around new technology platforms. For firms that are prepared to issue equity a whole host of alternatives such as crowdfunding suddenly comes into play.

Crowdfunding has moved from being on the fringes of business finance to be formally recognised as a legitimate investment activity by the Financial Conduct Authority (FCA). This significant shift occurred in April when the financial watchdog started regulating the industry, and I’m proud that CrowdBnk was ahead of the curve and effectively compliant with the new FCA rules before they came into force. The recent Bank of England research also states that more small companies are turning to alternative sources of finance. These are all signs that crowdfunding is coming of age. More SMEs are recognising the opportunity to raise money cheaply and directly from the many, rather than relying on the traditional few of the mainstream banking industry. A platform such as ours forges introductions with investors who also often act as mentors to growing firms. We have the expertise to help businesses with corporate finance, and a lot of due diligence takes place with a company before we’ll agree to list it. The whole process is of great benefit to the enterprises involved.

But, still, many small business owners live in fear of giving up equity, regarding it as a loss of control. It’s a challenge for our industry - to demonstrate that entrepreneur-investor relationships can be both happy and mutually beneficial. Of course, I’m not suggesting that debt doesn’t have its place. A mixture of debt and equity will be the formula for most companies at different stages in their lifecycle. My point is that small enterprises have a disproportionate fear of offering equity, and should realise it is a sound alternative to the more familiar debt route. We need to educate SMEs in what giving investors a stake in their business really involves, and the potential gains. Real people are keen to support Britain’s businesses where, currently, banks are not. Now, it’s time for companies to shed their inhibitions, and learn to love the ‘crowd’.

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