Alternative routes to business funding
19 February 2016
2 min read
It’s worrying, he agrees, but steadily getting better: “There’s been a massive increase of awareness on two years ago, largely down to the financial press and small, innovative finance providers getting exposure. So it’s not all bad news.”
There is a recognition at ministerial level that it’s an issue and new banking referrals legislation explicitly realises that government intervention is necessary to transform the marketplace, which at the moment is dominated by four or five major lenders (essentially, the banks). Now, if a bank turns a lender down, from the beginning of 2016 they are required by law to provide details to one or more designated funders, with the applicant’s permission.
This means the huge amounts of rejected SME applications can be redirected into an ecosystem, allowing them to receive the right advice and funding from the right places. When you consider that with new regulation 50,000 or more SMEs every year will obtain finance that they wouldn’t have done before, the impact on growth could be enormous.
Alternative finance isn’t new, says Mr Tavener, whose initial working paper to Downing Street formed the basis of the new regulation: “Asset finance has been doing it for years but that part of the marketplace is well understood.” But it’s the new sea of peer-to-peer and crowd lenders that needs to be properly navigated.
The first thing borrowers have to ask, says Mr Tavener, is, “What is the finance for? Is it needed for a long time? Is it structural? Is it cash-flow related? Do I need it across the whole business? At the outset you have to identify exactly what you want. ‘I just want more money’ is not a good reason.”
What the Alternative Business Funding portal does is work through these issues and weed out the kind of providers to whom borrowers should be talking. “The best tech is about eliminating the improbable,” he says. ABF takes a twin-track approach. Once it knows who you are it will be able to access every salient point about the business without affecting credit rating. Then it will accurately predict who will want to lend to you and whose product is most appropriate, providing four or five appropriate funders.
However, this new way doesn’t preclude human interaction, says Mr Tavener, far from it. “We see room for both. There’s always a place for good corporate finance brokers. These deals need a multi-source provision.”
The ABF is the senior platform in the space at the moment but Mr Tavener says he sees the venture as more of a collaboration than a competition. “We are trying to achieve long-term behavioural change.” So far, it’s working out, he says. “Each domino has fallen precisely where we thought it should fall. There is no question that our brief history has been exceptionally influential.”
The process rewards funders for putting their own rejects in the marketplace and has significant benefits for them as it also gives them access to high-quality, low-cost applicants, gives them a secondary revenue stream that brings down their costs. “And this will drive efficiency.”