A restitution fund worth more than £800m is helping neobanks and fintech startups take on the big high street banks. This initiative gives accountants an opportunity to advise clients more actively on small business finance, writes Capitalise.com chief product officer Ollie Maitland.
Small business lending in the UK has been dogged by problems for the past decade. Since the big banks retreated from lending to small businesses following the 2008 crisis, the gap has been filled by more than 360 other lenders looking to carve out different niches in the market.
In spite of this profusion of alternative sources, government figures reveal that the big four banks still own 85% of the SME lending market.
Following RBS’s failure to either float or sell Williams & Glyn, the government agreed to distribute £833m to encourage account switching and created a grant scheme to increase competition in the funding market. The second element of this package, which evolved into the Capability and Innovation Fund, is designed to help other financial institutions grow their infrastructure to better compete with the large banks.
The progress of this project should interest accountants, who are increasingly supporting their small business clients with advice on key financial decisions. The restitution scheme is unlikely to show measurable results for a few years, but it should make it easier for small businesses to tap into a more diverse lending infrastructure and choose from a wider selection of lenders.
Critically, the fund requires recipients of its largesse to grow their market share or money may be clawed back. Lenders will be on the lookout for well run, growing businesses that will help them grow their assets in sustainable way while demonstrating to investors and the government that they are backing small businesses in the UK. This scenario presents an enormous opportunity for businesses and accountants can help guide them through the changing landscape.
The picture for lenders
The Capability and Innovation Fund (CIF) has been split into four pools that are being dished out in tranches over the past year.
- Pools A and B were designed to support companies offering enhanced business current accounts and related services to small businesses. A total of £350m was distributed earlier this year from these funds, with £280m from pool A going to the digital banks Metro, Starling and ClearBank/Tide. Nationwide, Investec and Co-op Bank got a total of £30m form pool B to help them expand their business offerings and recruit new customers.
- Pool D, which was announced in June, and pool C, which will be announced in July, are more focused on helping fledgling businesses roll innovative products out to a much wider market, rather than just putting more liquidity into the market. The pool D recipients included the cashflow forecasting tool Fluidly, two fintech platform builders (Codat and Form3 Joint), Funding Options and Swoop, which is building a virtual finance dashboard for CFOs.
The companies that successfully secured funding from the innovation fund should celebrate. However, the additional funds come with some strings attached. Some of the successful pool D bidders projected extremely ambitious targets and could face clawbacks if they are not able to hit them. The terms of the grands do not allow for revisions to the submitted business plan, which will make things difficult for the recipients to change course or pivot their business models as they grow.
The opportunity for advisers
The government’s overall objective to introduce more competition in SME lending is commendable and should mean that more funds become available to viable small businesses. This expansion offers advisers a chance to enhance their role with business clients as financial consultants - a role formerly played by bank managers.
The publicity surrounding the CIF grants and the emerging fintech sector will play its part in prompting business clients to ask about new funding options. Accountants should rightfully warn clients against the temptations of easy money, but where there is a genuine need and a good business case, the conditions are becoming very favourable for SMEs to secure funding on terms that suit them.
How should accountants respond when clients come asking about the kinds of services and offerings by the beneficiaries of the innovation fund?
Typically, the small business facing a cash flow shortfall will only confront the problem with a week before it hits them, and spend just one hour researching finance providers. Four out of five of them approach only one lender.
Research from BVA shows that 70% of SMEs use loans, overdrafts or credit cards to finance their business with only 12% using other external forms of finance. This is likely down to a simple lack of education about the products out there. For example, alternate and invoicing finance companies now lend over £5bn a year to small businesses, with products that might be more suitable to clients.
Becoming the bank manager
Digital automation of traditional bookkeeping is putting pressure on the margins of many accountancy firms. At the same time the reduction in UK high street bank branches from 22,000 in the 1990s to fewer than 7,000 today means that many small businesses have fewer ports of call for advice on business finance. The banking remedies fund is a significant attempt to inject badly-needed competition into SME lending and will have a big impact on the landscape.
Accountants are financially literate and regulated and can prove their value here by becoming more familiar with the variety of finance sources and the differences between them. As well as helping clients get a stronger grip on cash, when the crunch does come the adviser should be in a position to help them understand the most suitable type of funding for their business.