Given a post-Brexit slowdown in bank lending seems all but inevitable, could alternative finance offer a solution to franchises’ borrowing woes?
Shock was the first response of many businesses to the vote for Britain to leave the EU. Even the city’s largest financial institutions were caught unawares on June 23, with no real contingency plan for Brexit in place. With so much uncertainty and the impact on the UK economy yet to be fully felt, franchise owners and smaller businesses will be wondering what it all means for them and their future chances of accessing funding.
However, unlike during the downturn of 2008, today an alternative finance industry exists to keep money flowing to SMEs should bank capital dry up. In fact, the current upheaval may be the prompt many business owners need to finally discover the range of options alternative providers have to offer.
It’s still unclear whether the banks will pull credit lines to small businesses in the wake of the Brexit vote – though some anecdotal evidence suggests this may already be occurring – but the UK losing its AAA credit rating is bound to have an impact on high street lenders’ willingness or ability to extend customers credit. And we all know how disastrous the banking institutions’ behaviour during the last recession proved for SMEs.
Smaller firms were starved of credit when the banks shrank their loan books in response to the last economic crisis. According to analysis by RBS, lending to SMEs peaked at £220bn in the first three months of 2009 but fell away sharply after this, with about £50bn less available to firms four years later. In truth, small business funding has never entirely recovered, with bank lending levels still below those of the pre-crisis years.
This brutal stocktaking by the banks was felt strongly in the franchising community. The specific effects of the economic downturn on UK franchise funding have not been recorded but US research suggests franchises in the States only had 10% of the borrowing they needed by 2013 as a direct result of the credit crisis. Nevertheless, the new generation of alternative funders that emerged from that lending shortfall should mean entrepreneurs don’t face the same barriers this time around.
The emergence of alternative finance – or altfi – was a direct consequence of the banks’ reaction to the credit crunch of the late 2000s. A perfect storm occurred where small and medium-sized businesses were deprived of much-needed funding by the banking institutions at the same time that innovative technology was opening up a world of opportunity to fintech pioneers keen to fill the funding gap.
The internet, emerging digital platforms and revolutionary software and algorithms enabled new financial services entrants to offer businesses fast, flexible and radically different ways to borrow money, as well as letting individuals invest their own savings in projects they thought worthwhile.
The numbers speak for themselves: the UK altfi industry did £3.2bn worth of business in 2015. Additionally, it now accounts for 12% of all British small-business lending, according to the latest report from the University of Cambridge and Nesta, the innovation charity. When you consider that altfi was little more than a handful of startups at the beginning of the decade, you appreciate just how impressive a feat this is.
Franchises are among those embracing the possibilities of these new forms of business funding. For example gym franchisor énergie recently raised almost £650,000 for its expansion plans through crowdfunding platform Crowdcube. Like several other industry sectors – such as hospitality, retail, beauty and service firms – franchises have proven less popular with mainstream funders.
Altfi providers focusing on sectors that conventional lenders frequently shun has been part of the altfi sector’s success, since they recognise that these are successful businesses with great potential, despite not fitting the banks’ rigid lending criteria.
But while the challengers to the financial services norm have reason to be proud of their achievements, we all still face a significant hurdle and one that could materially affect our ability to help UK businesses in the months and years ahead.
Awareness of altfi remains stubbornly low among business owners, despite our industry’s success and growing prominence. Of firms that have borrowed or that plan to borrow, the vast majority – almost 93% – are familiar with bank overdraft facilities, compared with just four out of ten that know about alternative lending models, such as peer-to-peer finance, recent research by the British Chambers of Commerce found.
Recognition and trust are also a factor in this. Small-business owners are healthily cynical and take some persuading that something new is entirely to be trusted. This is understandable, though the alternative finance industry’s track record should now persuade more bosses that it is tested, serious and here to stay. In fact, fintech is changing the face of financial services, with many of its practices being adopted by larger, more traditional organisations. But until it gets its message across, SMEs will still rely on the big high-street banks for 80% of all of their credit. We must break this stranglehold and demonstrate to entrepreneurs – those running franchises and independently established businesses alike – that alternative finance can offer them something preferable to conventional banking.
So why might alternative finance suddenly look more attractive to those running businesses and seeking funding? The industry is now established, stable and ready to build upon its already strong foundations, yet still small enough to be nimble in the face of change. It can adapt quickly, frequently operate where banks cannot and morph its offering to the shifting needs of Britain’s franchisees and business owners. In the wake of the Brexit vote, change is one of the few things we can be certain of, so this ability to be flexible should not be underestimated. Cautious, process-bound banks with unwieldy legacy systems will simply be unable to keep up.
Additionally, while some altfi businesses, such as equity crowdfunders, are regulated, many other areas are either not bound by regulation at present or have to adhere to far less legislation than their banking rivals. This gives them a distinct advantage at a time when regulatory issues are set for massive upheaval and redrafting, a process which will no doubt take many years to resolve.
Fundamentally, what sets altfi lenders apart from more conventional business funders is that they’re still hungry to do business with Britain’s SMEs and have the resources, expertise and experience to do so. Undercapitalisation remains one of the major reasons businesses fail and franchises are no different.
When our economy is going through such a state of flux, to put more SMEs at risk by depriving them of funding would be wrong and hugely detrimental to the UK’s overall economic wellbeing. Brexit or no Brexit, as long as small firms and franchises are doing good work, altfi will be ready to help them to achieve their goals. The industry’s challenge is to make more business owners aware of that fact.