The SME lending market is becoming a crowded space
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This week we heard from the Treasury again. Their message was to the point. The pre-election 'purdah' was over, and not only were they getting back to the business of delivering the bank referrals part of the Small Business Act, they were seriously getting a move on with some pretty tight timescales for us all to stick to with respect to shaping the detail of the regulations.
This is, of course, good news both for the SME community and for those of us who have lobbied and delivered the framework for small business to have better access to a much more diverse collection of offerings when considering how best to source finance. It looks like the Act will be in full swing and delivering during the first quarter of 2016, although readers of my previous blogs will know that some of the bigger banks caught in the scope of the Act are already beginning to adopt its collaborative ethos.
One group in particular must be watching developments in this space with keen interest. The last 12 months has seen a proliferation in the number of new “alternative” funders entering the market, with many more set to launch soon. Given that currently the total penetration of crowd and P2P propositions into the SME lending space is less than 5% of the total (with the asset-based lenders and banks making up the vast majority of the balance) this is beginning to feel like a very crowded market where supply currently outstrips demand.
The real causes of this are various. Continued low awareness from SMEs regarding alternatives is a contributing factor, as is the re-entry of some banks into the SME lending market (or rather, a renewed enthusiasm for it) which has taken some of the heat out of the search for funding.
The upshot of this situation is that for many non-bank funders the cost of acquiring new borrowers outstrips the lifetime value of the deal. I choose my words carefully here. It’s not simply a burn rate we are seeing, which would right itself in time with sufficient volume, but a systemic business model problem based on what were possibly optimistic assumptions as to how much demand one’s business development team could deliver.
Thus a lot of investor cash is being burned on business models that have no hope of profitability unless there is a quantum shift in how these lenders attract volume business, and at what cost. One has to suspect that old fashioned distribution models such as business development teams will become redundant very rapidly as the new environment takes shape, and, if the Government’s objectives are met, more and more SMEs research and source their funding choices online.
One can see a real possibility that designated funding platforms that handle the bank rejection/collaboration traffic will not just deliver better outcomes for SMEs, they may also be the only way a good proportion of the non-bank funders can distribute their products in a cost effective manner.
So for some this must be something of a nerve-wracking race against time and, I guess, that not all will make it.
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